Dawn Pennington

Time, Price and an Option's Profitability

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So, if you buy an in-the-money call and the stock doesn't have time to make much of a move, your option may be profitable. But depending on how much you paid versus how much upside you were able to capture, you might not be banking an impressive return.

Similarly, if you are holding an option at the $50 call strike and the underlying stock finishes at $49.99, unfortunately it's "close but no cigar." Even if the stock manages to finish at $50 or a few cents above it, the option may still expire worthless.

Think of it this way: The call option at the $50 strike gives you the right to buy shares at $50. And if shares are trading at $50 on expiration Friday, your at-the-money option doesn't give you any edge over other traders who didn't hold that same option, so that's why we would say it expired worthless.

PAYING A FEW CENTS MORE MAY UP YOUR ODDS OF PROFITING BIG

You can buy options up to 2 1/2 years before they expire. These are called LEAPS, and they cost a bit more than shorter-term options. (Shorter-term options typically expire in nine months or less). But if you're looking to profit from a significant stock move, the extra expense for the added probability of profiting may be worth it.

As you can see, the stock price greatly affects the price of the option, but it's just one of many factors that can impact your trade.

The moral to the story is to get into trades where you can not only recoup your commission costs but also walk away with a profit on top of that. The less you pay and the more the stock moves, the more money you can make. And that's why we're all in this game!