Anonymous
Anonymous asked in Business & FinanceInvesting · 1 month ago

Do you have to buy the stock at a higher price if the stock price rises when using stock options?

Update:

tardis, you didn't answer my question

Update 2:

that makes no sense, it's just a question and it's not your business what I do and it's not your business either since you can't explain what stock options are

3 Answers

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  • 1 month ago

    There are two ways you can buy a stock through a stock option. If you do buy a stock through a stock option the price you will pay for the stock will be the strike price of the option. 

    (1) You can buy a call option.  As the holder (buyer) of the option you have the right to choose rather to buy the stock or not. You will only buy the stock if you exercise the option. If the current price of the stock is less than the strike price you will not exercise the option and will not buy the stock. You will normally only exercise the option if you want to buy the stock and the stock price is greater than the strike price. 

    (2) You can sell a put option.  As the writer (seller) of the option you have an obligation to buy the stock at the strike price if the holder of the option chooses to exercise the option. As the writer you have no choice. If the current stock price is less than the strike price of the option when the holder exercises the option you will have to buy the stock at a higher price.

    Notes:

    (1) Because the buyer pays the seller a premium when the option contract is opened you need to adjust the price you paid for the stock by the premium price to determine the net price paid for the stock. This can adjustment often determines if the trader makes a profit or loss.

    Example for the buyer of call option:

    A stock is trading at $100 per share. You buy a call option with a strike price of $100 per share for $5. The stock is trading at $103 when you exercise the option and buy the stock for $100 per share, but your net price is $100+$5 = $105 so you have an unrecognized loss of $2 per share even though you bought the stock for less the market price.

    Example for the seller of a put option:

    A stock is trading at $100 per share. You sell at put option with a strike price of $100 per share for $4. The stock is trading at $99 per share when the holder exercises the option and you have to buy the stock for $100 per share, but your net price is $100-$5 = $95 so you have an unrecognized profit of $4 per share even though you bought the stock more than market price.

    (2) Option traders will often close their option position prior to the option being exercised and consequently never trade the stock.

    (3) Options trading is significantly more complicated than stock trading. Premiums (option prices) depend on multiple factors and there are risks associated with each factor. You should understand, and respect, each of these factors before trading options.  These factors are commonly knows as "the greeks" and include

    Delta - How fast option premiums when the stock price changes

    Gamma - How fast delta changes when the stock price changes

    Vega - How fast option premiums change when implied volatility of the stock price changes

    Theta - How fast option price changes as time passes

    Rho - How fast option price changes as interest rates change 

    (4) Options are one form of a derivative. There is another form of a derivative called a futures contract. With a futures contract neither party has a choice, the trade will take place as specified in the contract.

    Source(s): Options classes, books and trading experience
  • Amy
    Lv 7
    1 month ago

    One person sells an "option" to another person.

    Using the option is, as the name suggests, optional. The person who buys the option has the choice to use it or not. The seller of the option does not get a choice.

    This applies whether the option is to buy a stock (a "call" option) or to sell a stock (a "put" option). The buyer of a call can choose not to buy the stock from the seller of the call; the buyer of a put can choose not to sell a stock to the seller of the put.

    The seller makes their money by selling the option itself; they hope that you will end up doing nothing with it.

  • 1 month ago

    The strike price always has a premium (higher price).

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