It depends on how much you pay for the option. For example, if you bought 5 contracts on a $100 stock, with a strike price of $100, for let's say $3/contract, that will cost you $1500 (not including commission--which is similar to stock commission). The $3 is called a premium. Most options have premiums. If there was no premium, the options would be free in this case, because, the strike price and the stock price are the same. Okay now the stock moves to 120. The option should now be worth $23. However, as the option goes higher, I have noticed that the premium seems to get smaller, so maybe the option would be worth $21 (or $10,500). Now it splits. You will then have 10 contracts worth $10.50 (or $10,500). The stock goes to 75, the option should now be worth $25.50 (or $25,500).
If you do the math you will see that if you bought the same amount of stock (5 contracts represents 500 shares) you would make more money because you don't have a premium, however, most people don't have $50,000 (500 x 100) to spend on a stock.
BTW, I dream about making trades like that example. Man that would be nice......
Rob. |
