Easy money? Hypothetical options trading question

Intern in IB-M&A

Hypothetical question.

Lets say there is a stock that is currently trading at $100/share. I wanna buy a call option for May 1st, with a $90 strike price, and the premium is $5.

I would then pay $5 x 100 = $500. Since the option is "in the money" because the current share price of $100 is above the strike price of $90, I could immediately exercise the option. Because the strike price + premium is $95, and share price is $100, my profit would then be $5 x 100 = $500. Is this right?

New to options trading, so sorry if this is a low-IQ question. US-based stock if it makes a difference. Is there a minimum amount of time I have to wait to exercise the option or something else I'm missing? I found a stock that is in a similar scenario so I wanna know if i can make some easy money... lol.
If there are other, smarter plays with in-the-money options or low-risk low-margin ways to make money with options I would be happy to hear them.

Comments (9)

Mar 26, 2020

I don't think that would ever happen. And if it did, a computer would most certainly beat you to the punch.

Mar 26, 2020

depends on the time of option. American options allow you to exercise whenever, while European options can only be expired on the expiration date (type of option is not related to the geographical region in which it is traded). The option described above appears to be a European option. probably is thinly traded as well, therefore you may have difficult reselling the Orion if you wanted to

  • Intern in IB-M&A
Mar 26, 2020
Texas Tea:

I don't think that would ever happen. And if it did, a computer would most certainly beat you to the punch.

Hankmardukas95:

depends on the time of option. American options allow you to exercise whenever, while European options can only be expired on the expiration date (type of option is not related to the geographical region in which it is traded). The option described above appears to be a European option. probably is thinly traded as well, therefore you may have difficult reselling the Orion if you wanted to

Appreciate thecomments guys. Check out this example:

Looks like stock price is above break even price for $5.50 calls. Results in profit of $33, right?

Zynga is HQ'ed in San Francisco, would that make it US-based?

Again, if these are stupid questions, I'm sorry lol.

  • Incoming Analyst in IB - Gen
Mar 26, 2020

It's not a stupid question, you are right that there is an arbitrage opportunity given that screenshot. However, Robinhood doesn't show you the bid ask spread, only the average between the bid and ask. I bet if you tried to buy that option it wouldn't go through because the ask price is much higher than the bid, I just checked and the bid-ask is .02 - 2.00

    • 1
  • Analyst 1 in HF - Event
Mar 27, 2020

Heads up: robinhood FREQUENTLY misprices options. The spread is typically to wide for their algos. 99% of the time the order won't be filled if & if it is filled chances are you paid to much for the option.

Mar 26, 2020

^ good point, missed that

Mar 26, 2020

If you're interested in learning more, Mark Meldrum, a professor known for his CFA prep materials, has online lectures that go over the bible of financial derivatives called Options, Futures, and Other Derivatives by Hull. Completing those videos should give you a strong knowledge base about Options.

Mar 27, 2020

The data you're looking at might be delayed too. Most free/public stock data is 15-20 minutes behind hence the funny numbers you might be seeing. As another user said, it's unlikely you'd find actual cases of this in the real world, but if you do = $$$

Mar 27, 2020
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