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Break even price
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Break even price

  #1 (permalink)
Trading Apprentice
Vancouver
 
Futures Experience: Beginner
Platform: itrade
Favorite Futures: Stocks
 
Posts: 27 since Sep 2015
Thanks: 14 given, 5 received

Break even price

From what I have read if you buy the following call option:
1Dec40@2.50

The cost of this option would be $250. Your break even amount would be a stock price of $42.50
If the stock rises to 41 why not exercise? You've already spent the $250 to purchase the option...might as well get the stock at 40 instead of market value of 41 right?

Oh wait...the break even price is for trading the option...not buying the stock. You won't make a profit on it until it passes $42.50.

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  #2 (permalink)
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  #3 (permalink)
Trading Apprentice
Long Island, NY
 
Futures Experience: Advanced
Platform: TOS, OX
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brags View Post
From what I have read if you buy the following call option:
1Dec40@2.50

The cost of this option would be $250. Your break even amount would be a stock price of $42.50
If the stock rises to 41 why not exercise? You've already spent the $250 to purchase the option...might as well get the stock at 40 instead of market value of 41 right?

Oh wait...the break even price is for trading the option...not buying the stock. You won't make a profit on it until it passes $42.50.

Never exercise an option that has extrinsic (time) value. You should sell it instead.

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  #4 (permalink)
Market Wizard
Linz Austria
 
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Platform: Zaner360, TWS, Vantage
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Favorite Futures: Commodities
 
Posts: 1,101 since Nov 2014
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brags View Post
From what I have read if you buy the following call option:
1Dec40@2.50

The cost of this option would be $250. Your break even amount would be a stock price of $42.50
If the stock rises to 41 why not exercise? You've already spent the $250 to purchase the option...might as well get the stock at 40 instead of market value of 41 right?

Oh wait...the break even price is for trading the option...not buying the stock. You won't make a profit on it until it passes $42.50.

You can sell an option and make a profit (before fees), as soon as the value of the option has risen above the value at which you bought it.

And I agree with Warren: You should never exercise an option that has time value. Only (very rare) exception: There is no acceptable bid / ask.

Best regards, Myrrdin

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