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Beginner questions - options (buying, not writing)

Discussion in 'Derivatives' started by phgarry, Apr 12, 2014.

  1. phgarry

    phgarry

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    I would like to walk through what happens in the case of, say, buying a call option on the nasdaq (taken as example because I can just link to the prices).

    Current stock price = 39.209

    So let's say I buy a call option for MSFT with a strike price of 39.50. The nasdaq options summary page lists the call prices like this :

    (http://www.nasdaq.com/symbol/msft/option-chain)

    Apr 19, 2014 0.39 -0.10 0.36 0.38 19 1740 MSFT 39.50
    0.36 is highest bid, 0.38 is lowest ask. So let's assume you can buy this option at 0.38, and you do.

    So now you have an option:
    MSFT
    strike price 39.50
    cost 0.38

    Questions:
    1) 0.38 is a per-share price, right ? Or is it really the case that paying 0.38 gives you a 100 share option contract (which I read is the only one available on all US exchanges). So you pay USD 38 + commission, right ?
    2) As I understand American style options, this gives you the right to buy 100 MSFT shares at any point between now and Apr 19 for 39.50 per-share. Is that accurate ? How do you signal that you want to exercise an option, or does it just happen automatically when in-the-money ?
    3) Suppose you have an option that's in-the-money and about to expire, but you don't have a margin account. Concrete example : suppose miscrosoft goes up to 42$ by 19/4. What happens if you have less than 3950 USD available in your account ?
     
  2. So_Cynical

    So_Cynical The Contrarian Averager

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    1. 0.38 per share.
    2. yes.
    3. No money = you cant buy the shares.
     
  3. cutz

    cutz

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    Hey man,

    1, 0.38 is the contract price, so you're up for the contract price times the multiplier ( 100 ) times the number of contracts plus commish and fees.

    2, Yep, first part correct, with American style options you can message your broker to exercise early, on expiry most brokers will auto exercise long in the moneys, check with your broker.

    3, You can sell to close out the option position prior to the expiry deadline for a tidy profit.
     
  4. phgarry

    phgarry

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    How do you know what the share count on 1 contract is ?
     
  5. pixel

    pixel DIY Trader

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    On the ASX it's 100.
    It used to be 1000, but was reduced in 2011 to make ETOs more easily accessible to small punters.
    see https://www.asxonline.com/marketinfo/Doco/0611.pdf
     
  6. cutz

    cutz

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    By checking the contract specifications which are readily available on trading platforms or the exchange official site, as pixel pinted out most on the asx have a share per contract count of one hundred but many special cases exist like Fox jun - 112, Wow may - 101, Wes apr 99.
     
  7. hhse

    hhse

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    U.S & ASX = 100 shares - if you're uncertain, you can check on exchange website.

    * Close out your trade before expiry, by selling it - generally, brokers charge a higher fee for 'exercise/assignment'.
    * Don't exercise your option, sell it instead. There is still 'time value' embedded in option, buy exercising the option early you kill it off.

    And

    * Don't buy options (unless its part of some other strategy). Don't underestimate theta decay (time value decay).
    * https://www.tastytrade.com/tt/shows/tasty-bites/episodes/10089 [discusses buying premium]
     
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