Hello I have recently ventured into the world of options and find it quite interesting. However its a bit confusing. They are saying that when I exit out of a position I have to buy those stocks. For ex: I have 1 contract of AAPL. It goes up. I sell my call options. Do I know own 100 shares of AAPL and have to sell it again on the market? Thank you if anyone can help.
You can buy and sell options without trading the stock. 99% of option traders have no intention of trading the stock.
If you sell the option then you won't need to buy the stocks. You only buy the stock IF you want to when the option that you still have in your possession expires usually when the option is what's called in the money but you don't have to buy if you don't want to. That's why it's called "Option". It gives you the "option" to buy or sell the stock but not the obligation. For those who are new to options and want to dab into the option the world, I strongly suggest you read more about options and fully understand how it works before actually investing your money in them. You could lose a LOT of money in trading options. Consider yourself warned.
When you buy an option, the order you place is "buy to open" when you close your position and sell the option, you place an order to "sell to close". There is no need to exercise the call option assuming it goes up by a great deal. Just sell your call option to close it out. If you decide you want to exercise the call option, you should have the cash ready to pay for your shares. So, if it is a $10 call you bought and now that share price for that company is $20, you need to have $1000 to pay for those 100 shares. Broker exercises the call option and now, you own XYZ company which you bought at $10 and can sell it for $20 for a $1000 profit. If the call option cost you say $3.00 or $300, you actually, made only a $700 profit. You can also, sell the call option outright and say, it is worth $25.00 or $2,500 now, you would make a profit of $2200.
Thank you all so much for all the details and help. So if i may clarify something . All i would have to do is sell the call option and the difference between the stock price and the strike price is how much i would make or lose? So for ex: APPL is trading at 100 and the strike price is 103. I buy 1 contract for 10 usd . If AAPL moved to 105 and I sell my option would that mean I make 200-30= 70 usd ?
200 is the correct gross profit. Not sure where you got 30 from, and 200-30 is 170... I assume the missing 1 is a typo. Anyway, here is truth: Assuming 100 shares per contract: Premium: $10 Contract open fee: $3 Sell price: 105 Strike price: 103 Contract close fee: $1.50 Price diff: 105-103=$2 Maths: Price diff * contract size = gross profit (105 - 103) * 100 = $200 gross profit - premium - open fee - close fee = net profit $200 - $10 - $3 - $1.50= $186.50 net profit Note that if the price went below the strike; say, to 96, you lose only the premiums you paid plus fees; you DON'T lose the 100-96=$4 share = $400 price diff. Specifically, you'd lose $14.50 if you sell at 96. If the contract were to expire at this price, you'd lose $13. Paying to close when it's worthless is irrational; you just let it expire. Also, it might help you to know that with some brokers you can actually EXERCISE the option contract; that is, pay the $103/share, worth $10,300, when the market price is $105, worth $10,500. Then the actual shares are added to your portfolio. Taxes are outside the scope of this thread, but expect to pay 20-40% in taxes, depending... which I choose not to think about as much as possible. At a 30% tax rate your take is 186.50 - 55.95 = 130.55. Death and taxes, my friend.
WOW it is unbelievable that you would take the time to explain all of this to me. I really do appreciate and thank you tremendously for your efforts. Its helped me alot. I hope one day i can return the favor . Im sure ill have another stupid annoying questions though later lol.