What Does It Mean when ppl are buying Call Options?

[tucciotrader 10]

I have a few difficulties understandig why the market maker is not going to quote the call option at price strike below the dollar...what I don't uderstand is that the security is trading at 0,38$ on the nasdaq and its call options is trading at price strike >1$ and the open interests for this call options is huge (yet, I don't know for how many stocks a single call contract accounts for...maybe 1k?)

 

Why is anybody buying call options instead of buying the security itself?

 

http://finance.yahoo.com/q/op?s=CTIC&m=2011-01

http://finance.yahoo.com/q/op?s=CTIC&m=2012-01

 

Strike: 1.00

Last: 0.02

Open Int: 47,331

Expire at close Friday, January 21, 2011

--

Strike: 1.00

Last: 0.08

Open Int: 73,660

Expire at close Friday, January 20, 2012

 

thanks

[TheDude 10]

Probably because its OTM at a good price. Given the long dated expiry they hope there is good chance of this moving ITM over time perhaps? Given the dirt cheap price, whats to lose? Defined risk and unlimited upside sometime between now and Jan 2012.

 

Fill yer boots!!!

 

Probably Taleb holding the OI

[HowardCohodas 10]

I have a few difficulties understandig why the market maker is not going to quote the call option at price strike below the dollar...what I don't uderstand is that the security is trading at 0,38$ on the nasdaq and its call options is trading at price strike >1$ and the open interests for this call options is huge (yet, I don't know for how many stocks a single call contract accounts for...maybe 1k?)

 

A Nobel prize in economics was awarded in an attempt to model options prices based on market parameters. I accept the results, but don't claim to completely understand it either.

 

Once contract covers controls 100 shares.

 

You might start here to learn more about options.

[cuttshot 11]

These cheap stocks can be very volatile and unpredictable. Many times they are drug/pharmaceutical companies. All it takes is a rumor of a new drug coming out and these companies can pop big time. As a result traders make a cheap bet with call options to try and capture a big winner. So you will see a large open interest in the options.

 

One call option gives you control of 100 shares of stock. So to purchase 100 shares it will take $38. Your other option is to buy a call which let's say is selling for .02. This would cost you $2 to control the same 100 shares of stock. The trade off is that the option is only good for a certain amount of time. In your example of looking at the $1.00 call, should the stock make a big jump on news that call is going to have a really nice precentage return on that call.

 

All that to say the $1.00 call has a lot of open interest because of traders making a cheap bet on a large move in the stock (news, rumors, earnings).