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Last updated on August 24th, 2022 at 09:43 pm
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Call and put options can be a great investment, especially if you own or want to own stocks but have a set price that you are willing to buy or sell at. However, the price of options varies depending on the stock, the strike price, and the expiration date.
So why are some put and call options so cheap while others are expensive?
Some call/put options are cheap because they are out-of-the-money, and most investors believe there is very little chance they will go in the money before they expire. They are far from the strike price, or close to expiration, so the option buyer is unlikely to profit from the call, hence the low price.
Calls or puts could also be very cheap because the stock isn’t very volatile. If a stock rarely moves quickly then the options will be cheap to purchase, again because they are unlikely to move enough to be in the money prior to expiration.
Keep reading as I explain when call and put options are cheap and the biggest factors in determining the price of options. I’ll also suggest books that will teach you more about trading put and call options.
Cheap Call and Put Options
Call options allow the buyer the right to buy stock or other securities from the call seller at a certain price, called the strike price.
When you buy call options, you hope that the security price will rise above the option’s strike price or that it will move quickly and you can sell your call as the option price rises. When a stock’s price goes above the strike of the option you can exercise the option for a profit and buy the stock at a price lower than the current price or simply sell the call.
But when the current trading price is below the strike price, your option is out-of-the-money. Most people will buy call options when they are out-of-the-money, but the option’s price depends on how far out-of-the-money the call option is.
The other option is a put option. Put options allow the buyer to sell securities to the put seller at a certain price if they choose to do so. Similar to call options, there is no obligation to exercise the put.
While you do not want your securities value to decrease, put options can help you limit your losses if the security’s price does fall.
Put options are called in the money when the strike price is higher than the security’s current price. You can sell the security for more than it is currently worth when you exercise an in-the-money put option or you can sell the put at a profit.
But if the security price does not fall below the strike price, your option is out-of-the-money.
Out-of-the-money put options are typically more expensive when the trading price is close to the strike price. If the current price is much higher than the strike price, the put option will be very cheap since there is little chance you will exercise the option before it expires.
Factors That Affect Options Prices
If there is a good chance that the security will reach the strike price before the option expires, it will be more expensive since the option seller needs to earn money by taking on the possible risk of selling their security. On the other hand, if there is a small chance that the security will reach the strike price, the option will be cheaper.
A few factors will affect the likelihood of an option becoming in the money and, therefore, the price of the option, including the current price of the security and the time to expiration.
The following section explains these factors further.
Trading Price vs. Strike Price
The first factor is the difference between the option’s current trading price and the strike price of the security.
For example, say you own a call option, and the strike price is $40. If the security is currently at $39, there is a good chance that the call will be exercised, so it will not be a cheap option.
If you have the same option and the security is currently trading at $25, there is a huge gap between the strike price and the current trading price, so there is a small chance that the option will end up being in the money before it expires.
Therefore, it will be a cheap option. Much cheaper than the one in the first example.
The other major factor that affects the price of an option is the time to expiration. Let’s compare two put options. One has 14 days until it expires, and one has 60 days until expiration, with all else being the same.
The option with less time till expiration will be much cheaper than the one that is 4 times as long because the one with less time has a lower chance of being in the money than the other option.
Learn More About Options
Before you trade options and earn money trading them, you must understand how they work. While cheap options may seem appealing, they are often a waste of money if you do not choose the right ones since most of them expire with no value.
These books from will teach you more about put and call options so that you can make smart options trading decisions:
- OPTIONS TRADING: The 2021 CRASH COURSE: This book gives you an overview of what options trading is, how it works, and how to get started with an options broker. You will learn how to minimize your risk, stay in the right mindset, and day trade options if that is something you are interested in.
- Options Trading Strategies: This second book will teach you some options trading strategies that you can utilize to choose the best options. You will learn how to analyze different options and use strategies to trade them for profit and how you can find the best prices for buying and selling options.
The cheapest put and call options are the ones that have little chance of being in the money before they expire. They either have a large gap between the current trading price of the security and the strike price, or there is a short time left before the option expires, so it is unlikely that they will be in the money and not expire with no value.
If you are going to trade cheap options, you need to do some research and have reason to believe that the option will go in the money before it expires.