What’s the difference between purchasing a stock option close to the share price vs one far from the share price, and how does it affect profit?
In: 0
There are two ways an option’s strike price can be different and two different basic options…
Call Option–bet that the stock will go up
Put Option–bet that the stock will go down
Your strike price can be above, below, or at the strike price.
For a call option, the greater the strike price is below the current price of the security, the more expensive the premium will be. This is because the option is currently “in-the-money”–you can exercise it now and make a profit and any further appreciation is just more profit. The lower the strike price the greater your profit.
The higher the strike price is over the current price, the lower the premium is. You will not make money now until the current price exceeds the strike price (plus premium). Basically you are getting better “odds” on your money (lower premium) because their is more risk that the actual price will never exceed the strike price.
Put options are basically the opposite.
Latest Answers