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how do you make money buying call options that are out of the money? do they go back into the money before expiry?

ChuckMcM 9y ago
This is not investment advice! I'm just explaining how it works ... These days they have gone a bit crazy but it works like this, I would buy Jan '19 call options that are out of the money[1]. Looking at some that are 'fairly close' (closed at $315, options at $320). They are selling for about $55 [ibid]. So you buy a contract (100 shares) which costs you $5,500. Now if TSLA goes up during 2018 people will want to buy those calls from you for more than $55. Of course if TSLA goes down, or stays down all year then come January 19 you can either buy your 100 shares for an additional $32,000 (which you won't since you would lose money on that deal) or let the call expire in which case the person who sold the option keeps the shares and the $5,500 you spent. But here is the fun part, if TSLA goes up 10% (315 -> 346), now your calls are "in the money by $31", and if you look at calls in 2019 that are in the money for $30[2] you see they are trading around $69. Which if you sold your contract for that would get you $6,900 or a gain of 25%. Compared to the alternative of buying 18 shares at 315 for $5,670, and selling them when they went up 10% to 346 at $6,228 for a 10% gain. Buying actual shares is the safer way to go because if you buy a call option you lose the entire $5,500 if the stock doesn't go up above the strike price! Buying the call options gives you an opportunity to leverage the volatility for a higher return. I've observed there is a lot of 'passion' investing (rather than say reasonable investing) in TSLA where people buy it regardless and so it defies gravity and goes up anyway. [1] http://www.nasdaq.com/symbol/tsla/option-chain?dateindex=7&callput=call&money=out http://www.nasdaq.com/symbol/tsla/option-chain?dateindex=7&c... [2] http://www.nasdaq.com/symbol/tsla/option-chain?callput=call&money=in&dateindex=7&page=2 http://www.nasdaq.com/symbol/tsla/option-chain?callput=call&...
- Cthulhu_ 9y ago
  TL;DR higher risk for a chance at higher return or a 100% loss. Fair enough I guess. There's even more passion / panic investing and selling in cryptocurrencies at the moment. I think both Tesla and crypto are areas where a lot of people think they know a lot about, or are passionate about, and they go for that.

This is not investment advice! I'm just explaining how it works ... These days they have gone a bit crazy but it works like this, I would buy Jan '19 call options that are out of the money[1]. Looking at some that are 'fairly close' (closed at $315, options at $320). They are selling for about $55 [ibid]. So you buy a contract (100 shares) which costs you $5,500. Now if TSLA goes up during 2018 people will want to buy those calls from you for more than $55. Of course if TSLA goes down, or stays down all year then come January 19 you can either buy your 100 shares for an additional $32,000 (which you won't since you would lose money on that deal) or let the call expire in which case the person who sold the option keeps the shares and the $5,500 you spent. But here is the fun part, if TSLA goes up 10% (315 -> 346), now your calls are "in the money by $31", and if you look at calls in 2019 that are in the money for $30[2] you see they are trading around $69. Which if you sold your contract for that would get you $6,900 or a gain of 25%. Compared to the alternative of buying 18 shares at 315 for $5,670, and selling them when they went up 10% to 346 at $6,228 for a 10% gain. Buying actual shares is the safer way to go because if you buy a call option you lose the entire $5,500 if the stock doesn't go up above the strike price! Buying the call options gives you an opportunity to leverage the volatility for a higher return. I've observed there is a lot of 'passion' investing (rather than say reasonable investing) in TSLA where people buy it regardless and so it defies gravity and goes up anyway. [1] http://www.nasdaq.com/symbol/tsla/option-chain?dateindex=7&callput=call&money=out http://www.nasdaq.com/symbol/tsla/option-chain?dateindex=7&c... [2] http://www.nasdaq.com/symbol/tsla/option-chain?callput=call&money=in&dateindex=7&page=2 http://www.nasdaq.com/symbol/tsla/option-chain?callput=call&...

Cthulhu_ 9y ago
TL;DR higher risk for a chance at higher return or a 100% loss. Fair enough I guess. There's even more passion / panic investing and selling in cryptocurrencies at the moment. I think both Tesla and crypto are areas where a lot of people think they know a lot about, or are passionate about, and they go for that.