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Old 11-18-2014, 03:01 PM   #1

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Basic Question About Call Pricing


I'm trying to work out whether I can use options to implement a simple directional strategy. I can't be bothered reading any more books and thought I'd take a hands-on approach for a change, so I'm trading the strategy using a simulated options account.

Yesterday I bought an at the money Dec14 Call on VB expecting it to rally, which it has done.

I bought at $2.50 and the mid is now $3.02, so if I sell at $3.02 I'll realize a profit of $52.

If I'd bought and sold 100 shares of the underlying at the same time I would have a profit of $94.

Why has the price of the option increased less than the underlying?

Am I correct in thinking that if the option expired now (rather than me selling it) its change in value at expiration would have to be equal to the change in value of the underlying? Is the reason my option hasn't risen by $94 (or whatever) because there is still lots of time for the underlying to fall again?

100 shares of the underlying would have cost $11,566 and the option cost $250. Am I correct in thinking that I have had 55% of the return that I would have got from the underlying for round 2% of the outlay/exposure/risk?

If I had "known" that the underlying would rally fairly quickly, would it have been better to purchase the November Call that is just a few days from expiration? Should probably have done both yesterday so that I could see exactly what happened!

Many thanks for any help anyone is prepared to give.

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Old 11-27-2014, 01:44 AM   #2

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Re: Basic Question About Call Pricing

Conceptually you should be getting about 63 cents for every dollar it goes up. The delta is at 63. that is the reason it does not move in lockstep with the stock.
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