ARE THE COSTS FOR PURCHASING AN OPTION SIMILAR TO THE COSTS - ProProfs Discuss
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Are the costs for purchasing an option similar to the costs forpurchasing a futures contract?



Asked by Megan, Last updated: Oct 02, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

When you buy a call option, you pay a premium that you can never have back. thesame is not the case for a futures contract.compare the following two scenarios:1. you buy a copper futures contract and it costs you $2,700. a month later youdecide to sell your contract and unfortunately for you the price remains unchanged.you sell your contract for $2,700. you havent lost anything (im excluding commissioncosts).2. you buy a september 50 call option on xyz copper mining inc when the stock istrading at $50. the premium is currently $2.70 and you decide you can afford 10contracts for a total cost of $2,700 ($2.70 x 100 shares x 10 contracts = $2,700). amonth later you decide its time to get out of the investment. the price of xyz coppermining inc. has not changed, but the time value on the options has eroded becauseyoure now much closer to the option expiration. assume for this example that theoption price is now $1.50. you sell your options for total proceeds (excludingcommissions) of $1,500. you invested $2,700 but got back only $1,500.in both cases the price of the underlying asset remained unchanged, but because youhave to contend with time value on an option, youve lost money on the optionscontract.and consider what happens if you held on to the option right up until the expiry day andthe underlying stock price remained unchanged - you would lose your full $2,700investment in the option.
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