Options Trading Tutorial

Strike price in options?

Lets say a stock is trading at $1 and i buy calls for $0.10 with a strike price of $2.50 The day after I buy the stock doubles to $2. Does that mean i can sell and make a 10X profit even though it didn't reach the strike price? What would the difference be if the same thing happened but the strike price was $2? I should add that the stock doubles the same day... so that takes the time value away from the equation. Can't anyone just tell me the importance of the strike price.

Public Comments

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2. There are many factors other than the price of the stock and the strike price which are needed to calculate the price of an option. For example, if there are only a couple of days before expiration the difference between a $2.00 strike price and a $2.50 strike price could be huge, but if there is a year before expiration the difference would be much less. For another example, if there are only a couple of days before expiration and the big price increase was due to an expected event, such as an FDA approval of a new drug, you could actually see the price of the $2.50 call option go down on the day that the stock doubled in price. (The reason for this would be what is called a collapse of implied volatility. Before the FDA approval everyone would have known that there could have been explosive growth in the stock if the new drug was approved, but they did not know how high it would go. That would increase the demand for options and make them more expensive. Once the approval was announce people knew the announcement drove the price up to $2.00 and there was nothing else planned before expiration that was likely to increase the price to $2.50, so the demand for the option would decrease and make it less expensive.)
3. I wouldn't mess with options now with how high the vix is. Paying way too much of a premium.
4. 1. it depends on the volatility. 2. the premium would increase even higher. 3. strike price is very important because it determines whether you win or lose.