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Friday, March 28th
“Optionality is the property of asymmetric upside (preferably unlimited) with correspondingly limited downside (preferably tiny).”
-Nassim Taleb
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Markets Today
🌏 Asia-Pacific: Mixed
🇪🇺 Europe: Mixed
🇺🇸 United States: Down
🛢️ Oil: Up
⚡Crypto: Down
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Major Market Events
- Fed believes tariffs could spike inflation in short term
- AppLovin stock tumbles on reports of alleged “shady business”
- Lululemon falls after it admits to expecting slower sales
🤔 My Thoughts
We had a good question from a subscriber about the value of call options – and thought that it would be worth sharing the answer with everyone.
Options are bets about the future value of a stock, and call options typically represent a higher future value and put option typically represent a lower future value.
They will have an expiration date, and a strike price, and if a call option is “in the money” that means that the stock is at or above the strike price.
If a put option is in “in the money” that means that the stock is at or below the strike price.
In either situation that means you have the right to buy the stock at the strike price even if the actual stock price is much higher or lower.
(Many of you already know this, but it’s never bad to take a refresher.)
But what happens if you buy an option and you’re still not anywhere near the strike price?
Well you can still turn a profit!
Calls (and puts) can have value despite not being in the money. And you can win trades on them without them ever hitting your strike price.
Generally speaking, an out of the money call will become more valuable as it gets closer to the strike price.
That’s because its a bet on the future value of the asset, not the current value. Now options become less valuable as the time until the date of expiration decreases (this is called time decay) because people get more confident about the value of the asset on a closer date rather than one far out into the future
But you can turn a profit on an option without it ever being in the money.
Lets say you buy a call on AAPL for $250, 45 days into the future. Right now its at $220. But 10 days from now AAPL is at $240. So with 35 days still to go, your call should be worth more because now you’re only $10 out of the money instead of $30.
So on a liquid stock like AAPL you could likely sell that call for a profit, even though you’re still out of the money. And if AAPL never goes on to hit $250, you’ve still made money by selling an option that became more valuable than when you bought it.
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