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| JCF |
 Posted: Tue Aug 21, 2007 12:10 pm Post subject: Question about Options... |
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| Just a little question about options. Say you buy an option on a stock that is currently $40.00 a share. You buy a long call (American) and the strike price is $20.00. Could you just instantly sell the shares and profit? Why or why not? |
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| Im Not Warren Buffett |
| Posted: Tue Aug 21, 2007 3:23 pm Post subject: |
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CFO
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Seems too early in August to be doing Finance homework, but whatever...
No, you couldn't. Your option premium is going to include the intrinsic value in addition to the time value of the call. |
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| JCF |
| Posted: Tue Aug 21, 2007 6:42 pm Post subject: |
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| Thought so. I didn't really think that it could be that easy. |
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| efflandt |
| Posted: Tue Aug 21, 2007 6:51 pm Post subject: |
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Investing Manager
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Just as a rough example, EBAY closed today @ 34.40 and the last Sept 22.50 call sold for 12.60 (although, last ask was 12.20).
So if you bought the call and exersized now, your cost would be:
$1220 plus commission for the call plus $2250 plus commission to exercise = $3470+, which is more than the $3440 and single commission to just buy 100 shares of stock.
Price movement of a near month deep in the money call approximates the underlying stock. But many brokers charge as much commission to buy/sell an option as to buy/sell stock, so you may have double the commissions going the option route. Time value is roughly the interest you could make on the $2250 until expiration, which you give up if exercized before then. |
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