Basic Option question

[AbardinaSa]

I've been reading about options and I feel as though I am missing something obvious. Let me use an example...

Stock XYZ is trading at 12.5. I see a Strike of 10 and a Price of 3. I think the stock will go up. So I purchase one option (Buy to Open?). So I've spent $300 correct? (assume no commissions)

Lets say the stock goes up to 14 with a week before expiration and I want to cash out. Would I then Sell to Close? And if so would I then have made (14-10)*100 - 300 = $100?

[acajuxinij]

What if the stock actually drops and goes to 12 with a week left and I want to get out now? Could I then Sell to Close and if so would I lose $100?

For me to break even then would the stock price need to get to 13?

If this is wrong please explain why. Thanks for your help!

[aezvuzfc47]

If XYZ is at 12.50, you could buy to open a 10 Call for $3. That option controls 100 shares, so your cost is $300.

If the stock goes to 14 with a week before expiration, what will your 10 Call option be worth? That's a tricky question, because there will still be some time value left in the option. I would guess it might be worth 4.20. That would be $4 in intrinsic value, because the stock is at 14, and the option strike is at 10, plus my guess at 20c in time value.

So, your option went from $3.00 to $4.20, so your profit was (4.2-3.0)*100=$120.

If the stock dropped to 12 with a week left, your 10 Call would be worth $2, plus some time value, perhaps $2.10 total. So yes, you could sell to close your 10 Call option for $2.10. Your loss would be (3.0-2.1)*100 - $90.

[adasowice]

However, please note that in general, it is a bad idea to buy a Call option in the expiration month. Options decay at ever increasing rates, so if you are holding a long call option during expiration week, you are losing money daily.

It is a better strategy, if you are going to buy a long call, to do it with at least 45 days till expiration, and plan on selling to close the option if it gets inside 25-30 days till expiration. If you think you want to hold an option for a month, plan on buying an option that is at least 60 days till expiration, so that you can hold it for a month and still sell it before it gets to 30 days till expiration.

You might enjoy the video mentioned below. It talks about buying call options with 150 days till expiration that are Deep in the Money to simulate buying stock. It might give you some ideas.

[AgrwiBiC]

I was super confused too when I first started reading about options. What book are you reading? I tried learning it from a textbook and it didn't work to well lol.