Newbie question about Options trading

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#1 Fri, Jul 22, 2011 - 6:42pm
Joined: Jun 23, 2011

Newbie question about Options trading

So ive got a bit of reading lef to do on Options trading, and this is something i wanna try my hand at in the future. Nothing crazy of course off the bat. But im still not sure HOW options work. I tend to learn things a lot quicker/better when i am given a direct working example. So basically is the following example correct?

Lets say i want to buy a Call Option on SLV* (using it as an example since this is a metals forum). The strike price is 40$ or whatever the current price is, 39$ to make it easy for say april 2012.

I buy 1 call contract at say 100share with a strike price of 39$ for whatever the cost of the contract is. $2.00 or something i dunno.

So as i understand it, the price goes up over 40$ i can just straight sell it at a profit at any point before exp? So say the price goes to 45$ a share of SLV. I sell the contract that day and boom goes the dynamite?

Im a bit confused on when at what point one actually makes money (intrinsice/extrinsic) off the contract. Also a bit confused on what happens when the end price is below the strike price come exp date.

I understand the benefits of the profits, but not the severity of the losses.

A straight forward example of how this works would be sweet. And i thank anyone who can help me.

*yes i know slv bad blah blah i bet someone still points this out tho :p

Edited by: madcow on Nov 8, 2014 - 5:16am