MRK is selling at 27.03. If I buy a 27.5 call and it's data consists of
Last 1.85
Change- down .05
Bid 1.75
Ask 1.85
Volume 231
Open Int 9815
Then why would I only make .35 if MRK is selling at 29?
To understand why you would only make $0.35 if MRK is selling at $29, we need to consider the components of the call option and how it works.
A call option gives the buyer the right, but not the obligation, to buy the underlying stock (in this case, MRK) at a specific price (called the strike price) before a certain date (called the expiration date). In your case, you have bought a call option with a strike price of $27.50.
Now, let's break down the data of your call option to understand how it contributes to your potential profit:
1. Last: The last traded price of the call option was $1.85. This is the price at which the option was last bought or sold.
2. Change: The change represents the difference in the price of the call option compared to the previous trading session. In this case, it indicates that the price of the call option has decreased by $0.05.
3. Bid: The bid price is the price at which buyers are willing to purchase the call option. In this case, the highest bid is $1.75.
4. Ask: The ask price is the price at which sellers are willing to sell the call option. In this case, the lowest asking price is $1.85.
5. Volume: The volume represents the number of call options traded during the latest trading session. In this case, 231 contracts were traded.
6. Open Interest: The open interest is the total number of outstanding contracts that are still open but have not been exercised or expired. In this case, the open interest is 9,815 contracts.
Now, let's consider what happens if MRK is selling at $29:
Since the strike price of your call option is $27.50, if MRK is selling at $29, you can exercise your call option and buy the MRK stock at the strike price of $27.50. You can then either keep the stock or sell it at the market price of $29 to make a profit.
To calculate your potential profit, we can subtract the strike price from the selling price:
Profit per share = Selling price - Strike price
Profit per share = $29 - $27.50 = $1.50
However, since you paid a premium of $1.85 for the call option, you need to subtract that from the profit per share:
Total profit per share = Profit per share - Premium paid
Total profit per share = $1.50 - $1.85 = -$0.35
Therefore, in this scenario, you would actually have a loss of $0.35 per share. It is important to note that this calculation does not account for transaction costs or the time value of money.
Keep in mind that options trading involves risks, and it's essential to understand the mechanics and potential outcomes before making any investment decisions.