When Do You Actually Make a Profit.....

[md2324 10]

when trading just a regular Call option.

 

Example..... MCD currently trading at $93.55

The September $94 Call ( 28 days to exp. ) has a Bid of .90 and Ask of .98

So my question is, when exactly will I start to make a profit on my Call option?

Does the Option/Stock have to move.....

1. The .08 cents between the Bid x Ask spread

2. The cost to buy the Call for .98 cents

3. The difference between the $94 Call minus the price that the stock is currently trading at of $93.55 = .45 cents

 

So is the total required move in the stock, before I realize 1 cent of profit , $1.51 ( .08 + .98 + .45 ) ?

 

Thanks for the help, very much appreciated - Michael

[SIUYA 11]

its simple - if you buy the call for 98c you need the call option to go up in price so that the bid is at least 98c.

 

What makes the call option price go up....?

- changes in the underlying price --- the stock price rises (delta changes)

- changes in the underlying volatility -- the stock becomes more volatile (volatility changes)

- changes in any dividend assumptions or other parameters -- but you should ignore this for now.

 

I would say for a 90c option that the bid ask spread is quite large. You need to pay away something for Market makers to make money and want to provide liquidity and so the mid price is a reasonable level to try and buy the option to reduce this and then move it around - think of it like a negotiation. This will reduce the cost of the option.