Option Quotes, Expiration and Price
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Option Quotes, Expiration and Price

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Lets explore a bit how the price of an option can vary or how it can relate to the actual expiration date.
So what I’m going to do is compare two similar options
with the underlying stock being General Electric
and they are going to be the same in every way
except one is going to have a further out expiration date.
So lets compare
lets compare this call option right here
so this is a call option on GE
with a $17.00 strike price
so it’s the option to buy GE stock at $17.00
and it has an April 2011 expiration
so its going to expire
or the last day of trading that you could trade this option
would be the third Friday in April.
Lets compare that with the same
an option that has the same strike price
but has a December 2011 expiration
so we are going to look for a $17.00 strike price
right over here
and you can see right when you compare the options
that the one that has a further out expiration costs more.
This one costs $3.25 while this one only cost $2.36.
And the reason why it costs more is because you have
you get to retain the option for longer
so you can imagine $17.00
lets say that $ 17.00 is right over here
let me draw a hypothetical stock chart
so lets say that $17.00 is right over here.
And so you can imagine
lets say that you have both of those options
or you have the option to have either one of the options.
And lets say that the stock does something
lets say that the stock does something like that.
Well, its going to be in the money, you have the right
if you owned either one of those options
if you owned either one of those options
you have the option to buy the stocks at $17.00 and sell it at whatever price this is.
Maybe this price over here is like 20 something dollars so you would make money.
But if you have the option
with a closer
with a closer expiration
with the April 2011 expiration
you have to exercise the option right now
you would have to exercise it right now and close out the option.
If you had the longer dated option you could do it
you could do the exact same thing with the owner of an April 2011 option has
or you can hold the option and maybe see if the stock continues to go up
or you could imagine a downside scenario.
Someone who has
maybe the stock does something like this
where it goes out of the money.
Someone who holds the closer dated option
the one that expires first
they’ll be completely out of the money
the option would be worthless on this stage.
But if you have the option if you have the longer expiration date
if your option does not expire until December 2011
then you could hold it and maybe
maybe
the stock would do something nice
there is some probability that it would one day become in the money.
And I want to make it clear
even if you have this situation here
and you hold the longer dated option
you have the option that’s going to expire in December
you still would not want to exercise it
because there is someone who would still enjoy all of this
optionality of the futures.
So what you are better off doing
instead of exercising the option
you are better off selling the longer dated option right over there
and you should be able to capture at least as much profit
as you would from exercising the option

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