I'm having a real difficult time conceptualizing call options on Robinhood. I understand Call options and how they work, but what actually happens when you purchase a call option on Robin hood and then sell it before the expiration date. If it's ITM you're not actually getting those shares? When it expires ITM what exactly happens. The way it looks to me is your profit is based off of the premium delta?
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You can always buy/sell options at the market ask/bid, just like equities, ETFs, etc. Not to be harsh, but I don't think you should be trading options in your PA without a pretty deep understanding of how they work. Yes, you can make money if the underlying moves, but you can also lose money if it moves in the other direction, doesn't move fast enough, etc. For many retail investors/traders, options are a means to get highly levered exposure to an asset, but they don't understand the associated risk.
you are 100% dead on. MS undeserved
second this
I'm not trading them I'm just curious. What happens if i pay a call for $5 premium and then sell it before the expiration at 6$. Is this not just profiting from a change in premium. Further, let's say I hold until the expiration date. What exactly happens if it expires in-the-money? It just disappears and you're left with what, the premium that it expired at (x100 obviously)?
Fair enough. Yes, you are profiting from a change in premium, but that can be due to a number of causes - the underlying moved more than it was expected to, markets became more volatile (i.e. IV popped), changes in skew/kurtosis of the implied underlying distribution, etc. If you hold to expiration and it expires in the money, if it is a financially settled option, you will receive the payoff - (S-K)*100 for a vanilla call option on a stock. There are also options that are physically settled. Some options also have futures-style margining, as in there is no initial premium outlay, and each day you receive the mark-to-market difference in your account.
Hope this helped clarify.
Sign of a bubble....
When you purchase the call option: congratulations you have the right for the underwriter (some other entity) to sell you stock at a certain price.
If you sell a call option: easiest way to think about this is that you are actually underwriting a new call option for someone else, and then behind the scenes your broker and clearing-house is dealing with the netting. i.e. Robin sees that you are long call option and short a call option and pretends that you have no asset or liability. So if you buy a call option for 5 and sell it for six, you make one dollar and get rid of your liability through that netting process. Pre-expiration you almost never actually exercise options because their inherent optionality is worth something on top of the moneyness.
At expiration: even if the options are not cash-on-delivery options, your broker will usually offer you the ability to convert to cash for your convenience. The actually execution will probably be going on behind the scenes, though I'm not familiar with how this back office function works.
Options are contracts. So there are two parties involved. The Buyer and the Seller/Writer. The Buyer has the right to execute (he can choose what he wants to do). The seller/writer has the Obligation to deliver (meaning that no matter the buyer does, the seller is on the hook). I'm going to keep this to physical delivery as opposed to cash settlement since it makes for a cleaner example.
Microsoft is trading at $10/Share. You buy a $11 1 Month Call and pay a $1 Premium on the expectation that Microsoft goes up. On the day before expiration, the price of Microsoft is now $12.50/Share. The premium on the $11 Call at expiration is $2.50. There's two things you can do - Exercise the option or Close the position. If you close the position, you take in $1.50 per contract. If you exercise the option, that means you want to take the stock. In which case, you deliver $1100 and recieve 100 shares of MSFT.
Now, if you're writing calls, using the example above... you write an $11 Call for a $1 Premium. At expiration, you either close your call and lose $1.50, net, or you wait to see if your option gets executed. IF it does, depending on the settlement (cash or securities), you ARE REQUIRED to deliver 100 shares.
Options (both Calls and Puts) are 2 things 1- owning an option contract gives you "the option, but not the requirement if you don't desire" to buy (in the case of a Call) or sell (in the case of a Put) the underlying, at the designated price, in the designated time window (before the expiration date). 2- options are also tradable securities. if you buy an option, you now "own" that security itself. While you own the option contract, you "have the option to exercise". However, once you sell the option....you no longer "have the option" in both senses of the word "have".
it can be a little confusing...because of the way "option", "own" and "have" is used twice, but with slightly different meaning.
Once you understand that...then try to understand being "short" an option.
Pretty sure the OP understands the Investopedia definitions of call/put; he's more likely trying to understand why does a $10 2-month call that he bought for 50 cents 3 days ago suddenly show +500% return in his Robinhood account, how do you calculate what someone will pay 5 days from the day you bought the option if it moves x% in your direction, how did the inherent leverage in an option work and finally how did all these losers on reddit wallstreetbets turn into millionaires
Go read Sheldon natenberg’s book. Best beginner book out there.
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