One of the more interesting and hard concepts to learn is the concept of the strike price of the option. The strike price is the price for which you can sell the underlying stock. For instance, if you buy an option, the strike price is the price you are able to buy the stock at if you exercise the contract. Conservative investors usually will buy the option with the strike price very similar to the stock price, but riskier investors will set the strike price above or below the price of the stock. A strike price that is beyond the price of the stock could make the options contracts higher or lower depending if it’s a call or put strategy.
In the money refers to any strike price that is above the normal market price of the underlying asset. Whereas, out of the money is strike price below the market price of the stock. Being in the money is great when you are dealing with call options because you want the value of your option to increase as the stock increase. Put options are similar but opposite. In the money refers to the price of the stock going below the strike price of the option.
Out of the money options are usually cheaper because the option is more risky. For instance, a stock is valued at 100 dollars and you buy call options with as strike price of $105. It seems crazy to buy an option higher than strike, but if you think that the stock price will climb higher than 105, you could certainly make some profit off of the contract!
I have been playing around with these concepts and lost some money and acquired some gains along the way. Last night, $PTON stock price took a decent drop because of some tragic news about their product. I decided to jump into and buy 5 contracts with a in the money strike price of $104 for about .85 cents a contract. When the morning came, Peloton’s stock shot back up to close to $107! I profited about 900 bucks on that risky investment. The expiration of the contract was the same day! What are some of the more risky investments have you done and how well has that worked?