General Question

isorabins's avatar

Why is it possible to buy an open call option with a strike price below the current stock price?

Asked by isorabins (50points) November 1st, 2007

it seems like it should be impossible to do this, because the price of the stock is already more valuable than the option you’re purchasing. So in theory you could execute the option as soon as you buy it, for a profit, and a loss for the writer.

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2 Answers

ironhiway's avatar

You would not make a profit because the cost of the option added to the price would still be more than the current price of the stock. This is what is called the premium.

However if you knew the stock was going to continue to rise and if the premium was low you could effectively acquire more stock control for a larger return.

techclerk's avatar

The option was likely created before the stock price went up. If you can buy the option at a price that allows you to execute it and then dump your shares onto the leading bid for an immediate profit, then the writer made a mistake in his valuation or the writer did not react quickly enough to raise his price.

I would look again and see if the price to purchase the call option contains a premium to make you surrender the profit between the strike and the actual trading price of the underlying stock.

Some companies allow only the employees to buy stock, as they are privately help shares. These companies may elect to offer some employees a stock option plan, and they can elect to make the strike price less than the current valuation price, if that is what they choose to do.

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