Questions about options

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Juice Newton
Posts: 3
Joined: Wed Mar 18, 2015 1:02 pm

Questions about options

Post by Juice Newton »

Hello,

I signed up for this board to ask questions about investing that I can't seem to find by web searching.

One question I have is about options trading, which I am learning about lately. I've been looking over some options chains recently and I have found a few call options that are about to expire but are deep in the money. The thing is that the price of the contract is very low, to where the price of the contract plus the strike price is still below today's stock price. For instance, on one the contract price for a call option that expires at the end of the week is 1.57 and the strike is 1.50 but the stock price today is 4.25. Couldn't one buy the contract for $157, exercise it for $150 and sell the stock the same day (or next) for $425, thereby gaining $118? It seems like a sure thing that people should jump on every time but I don't see it happening, so I must be missing something.

What am I missing here?
Waba
Posts: 416
Joined: Wed Feb 26, 2014 9:19 pm

Re: Questions about options

Post by Waba »

Juice Newton wrote:What am I missing here?
Bogleheads follow the investment advice from Jack Bogle which is to buy and hold low cost index funds.
Options are not a part of the philosophy, nor is short term trading in either options or stocks.
As such this is not a very good website to ask questions about options.

If you want to learn about options I can recommend http://www.tastytrade.com which has a lot of educational content on options for beginning option traders (Note: traders, not investors).
Depending on how familiar you are with options and the various terms, you may want to stop by at http://www.cboe.com/learncenter/ first.

As to your question, the answer is "Absolutely not". You do not provide enough information to provide a more detailed answer but options are being sold by professionals (market makers employed by brokerage firms) and they don't give away money, EVER. At best, options trade for a price that is fair for the risk they represent. Option traders gladly take more of your money if you want to pay more than the fair price.
livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Questions about options

Post by livesoft »

Juice Newton wrote:What am I missing here?
I wonder if the quote is stale or incorrect. Or if a dividend is in the works that whoever gets the $118 would have to pay. And just because a quote is available does not mean there is anyone to take the other side of the trade. That is, many options have a volume of 0 and an open interest of 0. In this case, no one in their right mind would give away $118, so give it try and see if what you wrote really works.
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Bill M
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Joined: Sun Dec 30, 2012 10:10 pm

Re: Questions about options

Post by Bill M »

Deep in the money options don't trade frequently. You're probably looking at the last trade information; that says nothing about the current bid/ask spread. I can guarantee that you'll never buy at the "ask" price, exercise the option, sell the stock, and come out ahead.
Topic Author
Juice Newton
Posts: 3
Joined: Wed Mar 18, 2015 1:02 pm

Re: Questions about options

Post by Juice Newton »

livesoft wrote:
Juice Newton wrote:What am I missing here?
I wonder if the quote is stale or incorrect. Or if a dividend is in the works that whoever gets the $118 would have to pay. And just because a quote is available does not mean there is anyone to take the other side of the trade. That is, many options have a volume of 0 and an open interest of 0. In this case, no one in their right mind would give away $118, so give it try and see if what you wrote really works.
It looked like there were open interests. That's why I thought it was weird. Maybe it was indeed a stale quote. That has to be it. If I tried to buy them they wouldn't be there.
Topic Author
Juice Newton
Posts: 3
Joined: Wed Mar 18, 2015 1:02 pm

Re: Questions about options

Post by Juice Newton »

Bill M wrote:Deep in the money options don't trade frequently. You're probably looking at the last trade information; that says nothing about the current bid/ask spread. I can guarantee that you'll never buy at the "ask" price, exercise the option, sell the stock, and come out ahead.
Yes. When I looked at the same table on a different site the Ask price was different. I think the one site had a quote that had not been updated.

Ok. I guess it was a dumb question. :oops: Thanks for replying. :beer
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