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Comments:
<0> that is what shows up on !p
<1> if a share moves up by $1, an in the money option will not gain $1 in value
<1> but less, maybe a lot less
<0> why not?
<1> it just doesn't, that gain isn't locked in yet
<2> i thought it was based on the going price of the stock price
<2> for eg.
<2> in a long CALL, your only in the $ when the stock price is MORE than the strike price of the option contract?
<0> right
<1> yes, but the option doesn't pick up value as fast as the share
<0> why not?
<2> so we don't really calculate the actual costs of the options contract again ie. 0.6 - 1.6
<2> ie. not a $1 gain on the price of the contract
<1> a $1 move in one day might result say in a 60 cent gain for the call
<0> how come?
<0> i'm just trying to understand this
<0> not challenge you on everything
<1> basically because that gain is still contingent
<1> the shares might retrace their gains
<1> the option might never be excercised
<2> so like a slight delay?
<1> the closer you get to maturity and the deeper and deeper it's in the money
<1> then the closer you get to picking up the entire gain
<1> cause then it becomes more and more sure that you WILL excercise
<1> and that most of that gain will materialise when you do
<1> but early on and when you're barely in the money, it's very uncertain
<2> thus leaving nothing
<1> they call it the option's delta
<0> !return .6 1.2
<3> The Return rate for .6 -> 1.2 is: 100.0%
<1> the % of the gain of the shares it picks up
<0> if it picks up .60 tomorrow it's still 100% gain
<1> if the delta is 1/2 then a $1 move will pick up about $0.50 for the call
<0> when you sell
<1> delta can be from 0 to 1
<0> how can you find this information?
<2> ohh ok
<0> like online
<0> for free
<2> nomad: i'm looking at the Options Chain in my Ameritrade account
<2> why is it as when you get close to the strike date, the cost of the contract goes to 0 ?
<0> because it has no more value
<0> as an investment
<1> it doesn't go to 0
<2> so you're best not to wait
<1> it goes to the intrinsic value
<1> see, you should think of the option has having 2 components
<0> an option with 90 days to expiration has a higher intrinsic value than one with 1 day to expire
<1> there is the intrinsic value, which is current price - strike price
<1> this is the value if you excercise now
<0> current price (of stock)?
<1> then there is the time value, which is what you pay for the chance to gain more
<1> yeah
<2> ya
<1> if you buy at the money call, say, then all you pay for is time value
<1> you can also think of it as paying for the leverage
<1> cause you control a large position relative to what you've paid
<2> you mean just the cost of the options contract
<1> when the share price moves up, you start to pick up intrinsic value
<1> yeah
<1> but as you pick up intrinsic value, you lose some time value
<0> nomad: where can one find figures for delta on options online for free?
<2> well looking at YHOO January Calls
<1> you pick up say $1 intrinsic value, but you lose $0.40 of time value
<1> so you only gained $0.60 of total option value
<2> 37.50 contract.. it shows 0.05 cost
<1> the option used to be at the money
<1> now it's in the money
<1> the time value is in some sense more valuable when it's at the money
<1> since share price movements can ONLY lead to gain
<0> Exec. of Japanese Brokerage Allegedly Involved in Livedoor Deals Found Dead in Apparent Suicide
<1> if it goes down, you lose nothing
<1> if it goes up, you gain something
<0> ritual hari kari
<1> now if you're IN the money, it's different
<1> share price moves up, you gain
<1> share price moves down, you LOSE
<1> so from a statistical poitn of view, you'r emore exposed
<1> so you lose some time value
<1> shares moved up $1, you gained that $1 in intrinsic value
<1> but you lost a bit of time value, it's a bit less valuable now
<2> you're saying that if we buy the contracts while IN the Money.. you have more risk?
<1> the intrinsic value is more at risk, i suppose
<2> i mean you buy an 'in the $" contract
<1> also there is less leverage
<1> so you pay less time value
<0> interesting conversation folks
<0> but i have to get to sleep
<0> work in the morning
<1> later dude
<0> have a good night folks
<2> well I still think options scare me
<1> what i'm saying is, let's say you have some shares
<2> i've heard of people losing their whole house
<2> long on some shares?
<1> YHOO
<1> yeah, and you wanna buy calls on it
<1> what's YHOO at now?
<2> 35
<2> just over 35
<1> ok, so you buy some at the money calls, maturing 6 months out
<2> so what long call option contract you would buy?
<2> strike price of same 35
<1> and you also buy calls with strike 30 also maturing 6 months out
<1> yeah
<1> let's say the at the money calls cost you $3 a pop
<1> how much do you think the $30 strike are likely to cost?
<2> well at $30 you would be considered 'in the $"
<1> yeah, you're 5 bucks deep in it
<2> right
<1> so you might reason it will cost you $8 for the call
<1> but in reality it will be lses
<2> so the option contract price has to be at least $5?
<1> yeah
<1> for sure
<1> but since at the money was $3 you might reason it will be $8
<1> but in reality it will be less, it might be say $6.50
<2> k.
<2> so you buy 10 contracts 6.50
<1> you can think of it as several reasons
<1> one is leverage
<1> the guy who is at the money, when it matures, will participate in the entire gain of YHOO from now on till then
<1> same with the guy who's 5 bucks in the money
<2> yes
<1> he will also get the entire gain, and gets his 5 bucks back as well of course
<1> they will still be there
<1> so he has less leverage than the guy at the money
<1> he had to pay more, for the same profit potential
<1> so he should pay less time value
<1> not $3 but maybe $1.50
<2> ok
<2> i'm starting to see the picture
<1> so
<1> from the flip side
<1> let's say yesterday YHOO was at $30
<1> and some dude bought an at the money call then
<1> and he paid say $3 for it
<1> next day YHOO jumps to $35
<1> he's just gained $5 of intrinsic value
<2> yep
<1> but some guy in the market who's thinking about buying his call
<1> will not be willing to give him $3 of time value on top
<1> cause now it's fairly deeply in the money
<1> he might only be willing to give $1.50
<1> so his call didn't get the full $5 gain
<1> he got $3.50
<1> he got $5 in intrinsic value, but lost $1.50 in time value
<2> AHH OK
<1> so his call is not worth $8 but actually $6.50
<2> yes yes!
<1> when calls get deeply in the money
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