David, if at expiration the stock hasn't reached its strike price, then the option is worthless. If you're buying a Call option, and the stock price is below the strike price, then the value of the option is solely time value (the "bet" of how much higher the stock price will be than the strike price--at the expiration date). The longer the time until expiration, the more likely that the price can be attained. The option can be exercised at any time before expiration (although it would only make sense to exercise the option if it is "in the money," which is the case of a Call means above the strike price.
Experienced option traders (God, I sound like I know what I'm talking about) will not necessarily gamble on the option reaching its strike price, they usually just bet that the stock is going to move in a certain direction, then cash out when they've made a profit. It's no different than a stock, except that it can become worthless because of the expiration date. That's why, as a novice options trader, I believe it better to stay away from the expiration date. Buy IOM May 20 calls now, but plan to sell by the end of February. If you're right that the stock moved up, you should make some profit, because the time value hasn't lessened too much.
Maybe I can share my stupidities with you, and that might help.
12/18 Nike: bought 5 contracts (500 shares) of January 65 calls at 11/16 (stock at $54), next day stock is at 62, option sells for about 2, do I sell? No, I was mesmerised by the strike price. Could have made over $500 on $379 investment in one day. I thought it would continue to go up. I held...the option expired and was worthless.
12/17 Ligand: Bought 5 Feb 15 calls at 1 3/8 ($724, stock at 14) while hearing lots of hype. Stock goes to 17 in early Jan. Still hear more hype. Don't sell at $2.50, don't sell period. Worthless as of Friday.
11/22 Pepsi: Bought 5 April 35 calls at 5/8 ($348, stock at 30). Upon announcement of restaurant spin-off, stock goes to 36, option to $2.5. Learned lessons, put in a sell. Didn't get it. It was a fast market. There were forty others who also didn't get it. Price went down to $1.75, but I'd heard rumors that Pepsi would be worth a lot very soon. Bad earnings come out. At this point I can sell my options and break even at 5/8. Holding, but losing value because of time.
2/10 INTV Bought 5 March 12.5 calls at 7/8. (Stock hitting 12 for a recent low). Put faith in Shawn and Dan Zimmerman who does T/A for this stock. Dan said there's support at 11.75, and that INTV should probably hold there. With Shawn's bullishness for this quarter, I am hopeful Dan is right. Will sell when stock hits 13.5 or 14.
2/10 IOM Bought 10 May 20 calls at 1 1/4 based on recommendation from Shawn/Kevin. Will not give this one a lot of time.
So, as you can see. I've not done well. But I've learned a ton. If I'm smart, I believe options will eventually make me some money. The key is to "not be greedy."
Good luck.
BB |
