Under what condition would a "buy to open" call option expire worthless?

Financial Planning, Stocks
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May 2017

Panambur, Deva

New York, NY
75% of people found this answer helpful

Thank you for your question: (See definitions below)

As the seller of the put option you were assigned the stock because stock price was below the strike price. You had a few choices at that time a) Sell the stock at a loss. b) Hold on to the stock c) With the stock price below the original strike price, if you wanted to sell the stock at that original strike price and collect a premium for waiting, using an option, you would have had to sell a call at that original strike price. You would have received a premium and if and when the stock price went back up to that strike price, your stock would have been called away. On the other hand, if the stock fell, you would have suffered further losses. d) If your objective was to protect the stock that was assigned to you, you would have had to buy a put. But, you would ideally do it at the current stock price or below (you would do it at a higher price, paying a higher premium, in some cases).

Instead, you bought a call at that strike price by mistake- which essentially meant you had double the exposure to the stock. At expiration, if the stock price is higher than the strike price, you have a choice. 1) Do nothing, in which case as a holder of the call you will get the profits 2) Exercise the option in which case you will get to own the stock (In addition to the stock you already were assigned through the put).

At expiration, if stock price is below strike price, your call option will expire worthless.

Finally, having bought the call unintentionally, if you wanted to close the position out before expiration, you would 'sell to close' the call option and depending on the underlying stock price it would be at a loss or gain.

DEFINITIONS:

1) A put option gives the buyer (holder) the right but not the obligation to sell the stock at a particular price (Strike price) at a particular time. (Limited loss, unlimited gain) Conversely, the seller of the put is OBLIGATED to honor the contract if the holder wants it. (Limited gain, unlimited loss). If the stock price is below the strike price at expiration, the holder's position is profitable and the seller's is unprofitable.

2) It is the reverse for a call option- call option gives the buyer the right to purchase the stock at a particular strike price. If the stock price is above the strike price at expiration, the holder's position is profitable and the seller's is unprofitable.

3) As a buyer of an option, you will be assigned the stock only if you exercise it. If not, if the option is profitable, you will get the $ difference at expiration. If the option is unprofitable at expiration, it expires worthless. In the case of a put, the seller will get 'assigned' the stock if the stock price is below exercise price and the buyer exercises it . If the seller does not want to be assigned the stock, she has to cover it (ie buy it) before expiration. The seller of a call gets the stock 'called away' if the stock price is above the strike price and she owns the stock. If she does not own it, she will be short the stock.

4) When you have the words 'to open' in an order it is the first leg of any trade. So 'buy to open' means buy first (And then sell). 'Sell to open' means sell first. 'To close' is the second leg, ie the trade to close the position.

May 2017
May 2017