Stock option break even price less than current market price
Does this mean one can make infinite amount of money? Am I missing something? The question is - lets say current market price price is 100$. I buy a call option for strike price 99$ and premium $0.8. Shouldn't I buy the option then buy the stock and sell it immediately? I would technically make infinite money with this strategy? An I missing something?
Do you know how options work? Ok that was a rhetorical question
The question is - lets say current market price price is 100$. I buy a call option for strike price 99$ and premium $0.8. Shouldn't I buy the option then buy the stock and sell it immediately? I would technically make infinite money with this strategy? An I missing something?
Sell what immediately? A call?
You will not get such a call option
Why would an option ever have a negative time value?
If it’s a European option and there’s a dividend between now and the option date, it could happen.
For you to buy someone has to sell that option. While there might be pricing "anomalies" that make this happen, but you would not be able to do so in an unlimited fashion, plus what about transaction costs...?
Yeah technically infinite. Say Tesla opens at 335 tomorrow. You just freebased cocaine with elon in the back of an arbys, and you know for a fact teslas going to 420 by end of week. You’ll buy a dirt cheap $375 call expiring end of the week for a dollar a contract. You have to buy 100 contracts at a time though, but lucky for you, you have exactly $100 left after buying all those roast beef sandwiches and paying for your penicillin shot. So you buy the contracts. Now, you paid $1 per contract. So your break even will be 376. If Friday comes and tesla is under 375, you lose your whole $100. If it’s 375.50, you get $50. But for every dollar after 376 you’ll make $100 (because you have $100 contracts). So Tesla goes to 420, and boom you make $4500. But let’s say during your freebasing session Elon has a break through and makes a model T, for model time machine and makes an announcement about it on Thursday. TSLA shoots up to $1000. You now have made 62,400 off just $100! So theoretically unlimited gains but you can easily lose 100%.
Wow that's really complicated.
It’s really not. Your break even is the premium you pay + the strike price on your contract. If underlying security goes higher than break even you make money, if it doesn’t you lose money. It’s moreso gambling than investing but you can also sell options or buy puts and make spreads and iron condors etc etc which will mitigate risk. Say a company has earnings, you know the stock is either gonna tank or skyrocket. You can buy puts and calls and hope that the money you make off the right bet offsets the money you lost on the wrong bet. If the stock doesn’t move then you’re screwed.