Let’s say I buy 200 call option contracts with a strike at $9, they each cost 0.35. The stock is at $7 now. So this means if the stock goes up to $10… I make 10 – 9.35 (strike and premium) x 20,000 ?
So 0.65 x 20,000 = 13,000?
Seems abit low to risk 7k to make 13k
Is my understanding of profit correct?
byu/Jazzlike-Check9040 inoptions
Posted by Jazzlike-Check9040
4 Comments
Yep.
Your math is correct, your evaluation of the risk is not.
Think of it this way: you could buy the stock at $7, and sell at $10 for a 40% profit. If you’re assuming you win the trade of course it seems low risk. The difference is if the stock only goes to $8 you’re still making bank with the stock, but the calls quickly go to zero.
With options you need to be correct on both direction AND timing. Betting on directional movement with options is high risk. Size your positions appropriately.
How long are we talking? Most stocks don’t move 40%+ in a short time. Sounds like an easy way to lose 7k lol
The thing is, you’re not risking $7k to make $13k. You’re risking $7k against a wide range of possible outcomes. The stock could go to $20 (unlikely) in which case, you made over $200k on your initial $7k. The stock could go to $8.99, in which case, you lose your $7k even though you were right about the stocks directional move.