If I buy the June call option on SCMR at 12.50 what will happen? If the stock reaches $12.50 or more before expiration, can I sell it? Or, do I have to wait for it to expire? How would this work?

You have several basic questions about options. There are many factors you have to understand about options before you can successfully add them to your investment arsenal. If you do not understand how the work and how to apply them, you can get hurt much as you can get hurt if you do not know how to drive a car or the rules of the road and jump right in the driver’s seat and fire it up.

One thing to understand is the expiration period. Options expire the third Saturday of each month. That means this coming Saturday is an options expiration day. All June options, including the one you were looking at, will expire on Saturday if not exercised. As SCMR is well below $12.50 (the strike price of the option you are looking at), that option would have very little value now and would expire worthless. Why? Because you would not exercise the call option and thus buy the stock at $12.50 when you could go out on the market and buy it for about $9.50. An option’s value is made up primarily of intrinsic value (the in the money portion), time value (how much time the option has left before expiration), and volatility. If the stock reaches $12.50 by Friday, the option would be ‘at the money,’ i.e., the stock price would equal the strike price of the option ($12.50). If it stayed at that price, the option would still expire worthless. Why? Because it has no intrinsic value, there is no time left, and thus there is no volatility. Only if the option is in the money on Friday, i.e., greater than $12.50, would the option have some value. At that point the only thing left is intrinsic value. If the stock was at $13 on Friday, the $12.50 strike option would be worth $0.50 because you could buy the stock at $12.50 and then go sell it for $13.

You can sell an option at any time. You do not have to wait until the expiration day (Friday is the last day you or I can do anything with it as the options market is closed on Saturday). If you have a profit in your option, you can sell it whenever you want and you do not have to exercise the option to buy the stock.

There is a lot to options, but they are a very important part of any investor’s arsenal as we can use them to increase our returns, but do so in a safe manner using a variety of strategies. We cover these in our online seminars that will be starting back up in July for the next series.