Options Trading Tutorial

Stock options and strike price?

Once an option reaches its "strike price", then the option contract can be "exercised", correct? All the website tutorials say that before the option reachs the "strike price" it is worthless. But then there are bid/ask prices on options that have not reached their strike. So, can options be traded for profit/loss even when they are "out of the money"?

Public Comments

1. Yes, once the option contract has reached its strike price, the option can be exercises. If you don't reach the strike price then you're not making money. There are bids/ask prices on options that have not reached their strike because these traders want to get out of the position they have taken on whatever contract they have. You can buy the contract if you feel that a commodity will go to that strike price. So, yes options can be traded for profit/loss even when they are out of the money.
2. You can exercise the options regardless of the price of the underlying instrument...It's just crazy to buy a stock at $10 if it's selling in the open market for $9...But you don't know what the stock is going to do before expiration so that's why there are still value to "out of the money" options.
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4. You can buy and SELL them at any time prior to the expiration date. And if you are lucky you can even do it for a profit.
5. Yes, yes. Those are the answers to your questions.
6. Yes, you can trade options for profit/loss even when they are "Out of Money". Please do not forget to know about European Style Options and American Style Options.
7. You can trade options until expiry. Only at expiry do options become worthless if they are out of the money. Until then even out of the money options have value due to TIME. Once time is up there is only INTRINSIC Value .. the difference between the option strike price and the market price.
8. options are insurance on price movements. because they are out of the money or very unlikely doesnt make them worthless. "when the vol. is high, do the butterfly!"
9. Out of the money options are only worthless when the underlying stock price does not exceed (for calls) or go below (for puts) the strike price when they expire. Before expiration, they have time value. That is why there are people trading them. They are cheaper but it takes a larger movement of the underlying stock price to make a profit.
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