Understanding Options

Redacted · 28 November 2015

Hi,

I came across an option with an exercise price of $1.00 until mid-December. The premium per contract is $20 and the fee's are $30. The current price of the share on the market is $41.00.

Correct me if I'm wrong, but if I buy 4 contracts, I will pay $80 in premium, $30 in fees and then have 4 shares exercised at $4.00. I sell those at the market rate of $41 = $164, minus the premium + fee's = $110 and I'll have $54 profit left.

Am I missing something, or is this just a good deal?

skyQuake · 29 November 2015

Redacted said:
Hi,

I came across an option with an exercise price of $1.00 until mid-December. The premium per contract is $20 and the fee's are $30. The current price of the share on the market is $41.00.

Correct me if I'm wrong, but if I buy 4 contracts, I will pay $80 in premium, $30 in fees and then have 4 shares exercised at $4.00. I sell those at the market rate of $41 = $164, minus the premium + fee's = $110 and I'll have $54 profit left.

Am I missing something, or is this just a good deal?

Aus oppies are in lots of 100. So 1 option contract is for an exercise of 100 shares.

You might be looking at the last price of the option, and it just may have been a stale price that last traded months/years ago. eg Current bid/ask could be 39.5/43.3

What the stock/option code?

Redacted · 29 November 2015

skyQuake said:
Aus oppies are in lots of 100. So 1 option contract is for an exercise of 100 shares.

You might be looking at the last price of the option, and it just may have been a stale price that last traded months/years ago. eg Current bid/ask could be 39.5/43.3

What the stock/option code?

Ok, lets use another example.

There's another option with an exercise price of 10.50. The current share price for the share is 14.680. My logic says this is already in a good position to pick up and exercise immediately.

The query I have is the pricing for buying these. Commsec gives me the option to choose the order type, option type, code and contract quantity, which all make sense. But there's a final field called 'price limit' which when a figure is entered, this changes the amount of premium on the contract purchased.

I'm guessing this is would appear in the 'last trade' column when you look at all open call options. Which will then offer a price for someone to purchase from me? But, would this matter if I wanted to sell the underlying asset straight away? Further, if I'm the first buyer, which it seems like I would be, couldn't I put this price at 0.001, pay 10 cents premium on top of 100 shares, which will bring the total price to $10.60 and then sell them off immediately for a profit of $4.18 per share.

That said, I've seen people trade the ownership of options, rather than the actual underlying assets. Is it possible to do both?

skyQuake · 29 November 2015

Redacted said:
Ok, lets use another example.

There's another option with an exercise price of 10.50. The current share price for the share is 14.680. My logic says this is already in a good position to pick up and exercise immediately.

The query I have is the pricing for buying these. Commsec gives me the option to choose the order type, option type, code and contract quantity, which all make sense. But there's a final field called 'price limit' which when a figure is entered, this changes the amount of premium on the contract purchased.

Yep, limit is the price you're willing to pay.

I'm guessing this is would appear in the 'last trade' column when you look at all open call options. Which will then offer a price for someone to purchase from me? But, would this matter if I wanted to sell the underlying asset straight away? Further, if I'm the first buyer, which it seems like I would be, couldn't I put this price at 0.001, pay 10 cents premium on top of 100 shares, which will bring the total price to $10.60 and then sell them off immediately for a profit of $4.18 per share.

Bid = what someone is willing to pay for it
Ask/offer = what someone is willing to sell it for.
Exercise price = what you need to pay in addition to the purchase/prem to turn the option into a real share.

Most likely, the bid for that option will be around 3 and ask will be around 5. You would have to pay $5 for the option, then pay an extra $10.50 to exercise the stock = a total of $15.50 to own at $14.68 stock

That said, I've seen people trade the ownership of options, rather than the actual underlying assets. Is it possible to do both?

Buying and selling options is what some people do. Though the spreads in Aus are quite wide so its usually rare.

Redacted · 29 November 2015

skyQuake said:
Yep, limit is the price you're willing to pay.

Bid = what someone is willing to pay for it
Ask/offer = what someone is willing to sell it for.
Exercise price = what you need to pay in addition to the purchase/prem to turn the option into a real share.

Most likely, the bid for that option will be around 3 and ask will be around 5. You would have to pay $5 for the option, then pay an extra $10.50 to exercise the stock = a total of $15.50 to own at $14.68 stock

Buying and selling options is what some people do. Though the spreads in Aus are quite wide so its usually rare.

Thanks for the feedback on this one. I think the confusing part is the bid/ask is something I can't readily see. This is on the page where all call options for this company's shares are listed for a certain month (although other options that have been traded do have this), even when I'm on a page to purchase the option, there is no ask price.

If an option has no previous buyers/sellers, where can I find this information, or is it up to me to decide what that might be, and the person who created the option has to accept any price I offer?

Let's use the ASX's own call option, priced well below market price with ref code: ASXS48. There is no amount noted as the buy/ask amount against this code.

Exercise price: $31.670
Premium is 101 x the price limit.
Price limit put at .001. = Premium is $0.101 per share
For this example we order 1 contract
Fees = $35

My understanding is executing this order would buy 101 securities of ASX at 31.670 + the premium of 10.1 cents per share. = 31.681. Market price is 41.450. From here, we instantly sell all the shares for a profit of $9.769 per share.

If this is incorrect because there might be a higher ask price, where is the ask price noted?

skyQuake · 29 November 2015

Redacted said:
Thanks for the feedback on this one. I think the confusing part is the bid/ask is something I can't readily see. This is on the page where all call options for this company's shares are listed for a certain month (although other options that have been traded do have this), even when I'm on a page to purchase the option, there is no ask price.

If an option has no previous buyers/sellers, where can I find this information, or is it up to me to decide what that might be, and the person who created the option has to accept any price I offer?

Nobody has to accept any price they dont like. If you're paying $0.001 for an option with intrinsic value $1.50, your order just wont get done. Likewise on the sell side.

Let's use the ASX's own call option, priced well below market price with ref code: ASXS48. There is no amount noted as the buy/ask amount against this code.

Exercise price: $31.670
Premium is 101 x the price limit.
Price limit put at .001. = Premium is $0.101 per share
For this example we order 1 contract
Fees = $35

My understanding is executing this order would buy 101 securities of ASX at 31.670 + the premium of 10.1 cents per share. = 31.681. Market price is 41.450. From here, we instantly sell all the shares for a profit of $9.769 per share.

If this is incorrect because there might be a higher ask price, where is the ask price noted?

Nobody would simply sell you at 0.001

See attached: on friday before close the bid was $9.32 and ask was $10.09. Thus your 0.001 bid would not be traded.

cutz · 30 November 2015

Redacted said:
Thanks for the feedback on this one. I think the confusing part is the bid/ask is something I can't readily see. This is on the page where all call options for this company's shares are listed for a certain month (although other options that have been traded do have this), even when I'm on a page to purchase the option, there is no ask price.

If an option has no previous buyers/sellers, where can I find this information, or is it up to me to decide what that might be, and the person who created the option has to accept any price I offer?

Let's use the ASX's own call option, priced well below market price with ref code: ASXS48. There is no amount noted as the buy/ask amount against this code.

Exercise price: $31.670
Premium is 101 x the price limit.
Price limit put at .001. = Premium is $0.101 per share
For this example we order 1 contract
Fees = $35

My understanding is executing this order would buy 101 securities of ASX at 31.670 + the premium of 10.1 cents per share. = 31.681. Market price is 41.450. From here, we instantly sell all the shares for a profit of $9.769 per share.

If this is incorrect because there might be a higher ask price, where is the ask price noted?

The deep in the money contracts are not on continuous quote, to see the bid / ask you need to request a quote. Settlement price for the code you quoted is 981.5 cents, I would expect the bid / ask to be around 25 to 50 cents either side of the settlement price ( With the stock price at current level ).

Understanding Options

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