Options Trading Tutorial

basic equity options question(s)?

im looking into trading options (buying calls) and have a few questions.... lets assume the following; yahoo stock price right now; 32.00 yahoo may 37.50 calls are currently trading at 0.05/0.10 Implied volatility: 36.39 Time value: 0.15 Days to expiration: 32 now lets say i think yahoos stock price will go to 36.00 before the option expires. i do not plan to excercise the option...i just want to buy the call and sell it when the price of the underlying increase. a.) i can buy 100 calls for $1000, correct? b.) is there anyway, given the information i have provided (impled vol, days to expiration, time value), to determine what the price of the options will be if yahoo's stock price goes to say, 36.00? c.) if i cannot answer (b.), then lets assume the options rise in value to $0.50 i can then sell my 1000 calls for $50,000??? is that correct? (seems like a very dramatic movement) many thanks

Public Comments

1. Yes, assuming that 100 calls are offered at .10 (there could be fewer offered) you could buy 100 for $1000. No, there is no way to know the price of the calls because WHEN the stock goes to 36 is really the vital piece of the puzzle. If YHOO goes to 36 tomorrow then the calls might go to .50, if YHOO goes to 36 on the day of expiration then the calls will go even lower (no bid, offered at .05). No, your options aren't worth $50,000. You started with $1000, your options appreciated by 5X, so you end up with $5000. How and when the stock rallies is what really matters here. Option traders consider themselves more traders of volatility than anything else. If you buy the calls and the stock is very volatile upward then you'll make money. If the stock is not volatile, even if it goes up, you'll lose money. This is expiration week for options so look at how cheap some options set to expire on Friday are now (don't be confused by those stocks that will announce earnings between now and expiration).
2. a) correct b) no, It's based on supply and demand only. c) yes, in theory you could. ///