Big Board Toolbox

[boca_bobby]

THE PRICE OF OPTIONS:

FYI,

We have to remember that each contract is written to buy or sell 100 shares of the underlying assest (shares of stock). So whenever we get a quote for a contract we need to multiply that price by 100. So in the case of V:

June $100/CALLS @ $0.80

$0.80 X 100 = $80.00 per contract

Therefore if you want 10 contracs it will cost you $800 plus commish.

10 X $80 = $800 plus commish

Now commissions are usually charged as follows at most brokerage houses:

regular commish + additional commish per contract

In the case of TradeKing (my broker) it is $4.95 plus $0.65 per contract.

Next, I always like to buy as close to the money as possible and I also like to buy 10 contracts when possible. Why 10 contracts? I feel comfortable with that and also for each $1.00 movement in the contract price my profits (or losses) go up (or down) by a factor of $1000.00!!

So if you wanted to buy the 10 contracts with the $85 strike price $3.50 per contract, it would cost you $3500.00 plus commish for the opportunity.

$3.50 per contract X 100 shares per contract X 10 contracts

If V hits your target of $100 then you can expect your contracts with $85.00 strike price to be worth at least $15.00 per contract. Here's why:

PPS of Stock - Strike Price = Potential Option Value

$100 - $85 = $15.00

Therefore your profits for 10 contracts looks like this:

Potential Option Value - Price Paid for Contracts = Contract Profit

$15.00 - $3.50 = $12.50

Remember to multiplt that by 100 for the amount of shares in each contract.

$12.50 X 100 = $1250.00 per contract

Now multiply that by the 10 contracts you bought:

$1250.00 X 10 = $12,500.00

Oh and then subtract those pesky commissions on both the buy of the contracts and then again the sale of the contracts. You end up with a little over $12,400 for a months work.

Nice work if you can get it. LOL

Boca_Bobby