Price of a call option
When I log in to Schwab to look at these options it tells me there's only Adjusted Options available on these terms: Adjusted Options:   Multiplier: 100; Deliverable: 15 PTIE; Cash: ---- It does confirm your July Call quote price of $0.05 because the contract, though priced for 100 shares, will only deliver 15 shares.  Separately, looking at the company website for news there was a 7 for 1 Reverse Split announced on May 8, which is the culprit for this option adjustment and the seemingly nonsensical call price. "EDIT quid keenly identified the 1:7 reverse split In May 2017.  In a 1:7 reverse split, your shares are worth 7 times as much per share but you have 1/7 the amount of shares.  A share worth $3.78 now was worth (all else being equal) $0.54 a month ago.   So a call with a $2.50 strike a month ago was well out-of-the-money, and would now be the equivalent of a call with a $17.50 strike.  A $17.50 call with a $3.78 underlying (or a $2.50 call with a $0.54 underlying) would reasonably be worth only 5 cents. So I now suspect that the quote is a stale quote that existed pre-split and hasn't been adjusted by the provider. OLD ANSWER I can find no valid reason why those calls would be so cheap.  The stock price has been trending down from its onset in 2000, so either no one expects it to be above $2.50 in a month or it's so illiquid that there's not any real data to evaluate the options.  They did pay some massive (30%) dividends in 2010 and 2012, they've been hemorrhaging cash for the past 4 years at least, and I have found at least on ""strong sell"" rating, so there's not much to be optimistic about.  NASDAQ does not list any options for the stock, so it must be an OTC trade.   With an ask size of 10 you could buy calls on 1,000 shares for $0.05, so if you can afford to lose $50 and want to take a flyer you can give it a shot, but I suspect it's not a valid quote and is something that's been manufactured by the option broker."
The options market requires much more attention to avoid the situation you're describing. An overnight $10 ask will remain on the books most likely as Good-Til-Canceled.  The first to bid the low order gets it.  If traders are paying attention, which they probably are then they will bid at $10.  If not, they will bid immediately at $20. If they crossed the order, it would be filled at their higher than $10 bid. This is all governed by the exchange where the ask is posted, and most implement price-time priority. I don't think you understand options. If it expires, you can't write a new call for the same expiration date as it expired that day. Also what if the stock price decreases further to $40 or even more? If you think the stock will move in either way greatly, and you wish to be profit from it, look into straddles. An expiration 2 years out will have Sqr(2) (yes the square root of 2!) times the premium of the 1 year expiration. So if the option a year out sell for $1.00, two is only $1.41.  And if the stock trades for $10, but the strike is $12, why aren't you just waiting for expiration to write the next one? 1) Yes, both of your scenarios would lead to earning $10 on the transaction, at the strike date. If you purchased both of them (call it Scenario 3), you would make $20. 2) As to why this transaction may not be possible, consider the following: The Call and Put pricing you describe may not be available. What you have actually created is called 'arbitrage' - 2 identical assets can be bought and sold at different prices, leading to a zero-risk gain for the investor. In the real marketplace, if an option to buy asset X in January cost $90, would an option to sell asset X in January provide $110?  Without adding additional complexity about the features of asset x or the features of the options, buying a Call option is the same as selling a Put option [well, when selling a Put option you don't have the ability to choose whether the option is exercised, meaning buying options has value that selling options does not, but ignore that for a moment]. That means that you have arranged a marketplace where you would buy a Call option for only $90, but the seller of that same option would somehow receive $110.  For added clarity, consider the following: What if, in your example, the future price ended up being $200? Then, you could exercise your call option, buying a share for $90, selling it for $200, making $110 profit. You would not exercise your put option, making your total profit $110. Now consider: What if, in your example, the future price ended up being $10? You would buy for $10, exercise your put option and sell for $110, making a profit of $100. You would not exercise your call option, making your total profit $100. This highlights that if your initial assumptions existed, you would earn money (at least $20, and at most, unlimited based on a skyrocketing price compared to your $90 put option) regardless of the future price. Therefore such a scenario would not exist in the initial pricing of the options. Now perhaps there is an initial fee involved with the options, where the buyer or seller pays extra money up-front, regardless of the future price. That is a different scenario, and gets into the actual nature of options, where investors will arrange multiple simultaneous transactions in order to limit risk and retain reward within a certain band of future prices.  As pointed out by @Nick R, this fee would be very significant, for a call option which had a price set below the current price. Typically, options are sold 'out of the money' initially, which means that at the current share price (at the time the option is purchased), executing the option would lose you money. If you purchase an 'in the money' option, the transaction cost initially would by higher than any apparent gain you might have by immediately executing the option. For a more realistic Options example, assume that it costs $15 initially to buy either the Call option, or the Put option. In that case, after buying both options as listed in your scenarios you would earn a profit if the share price exceeded $120 [The $120 sale price less the $90 call option = $30, which is your total fee initially], or dropped below $80 [The $110 Put price less the $80 purchase price = $30]. This type of transaction implies that you expect the price to either swing up, or swing down, but not fall within the band between $80-$120. Perhaps you might do this if there was an upcoming election or other known event, which might be a failure or success, and you think the market has not properly accounted for either scenario in advance. I will leave further discussion on that topic [arranging options of different prices to create specific bands of profitability / loss] to another answer (or other questions which likely already exist on this site, or in fact, other resources), because it gets more complicated after that point, and is outside the root of your question. Think about it this way. If the strike price is $200, and cost of the option is $0.05. $200 + $0.05 is $200.05. That does not mean that the price of buying the option is more. Neither is the option writer going to pay you $70 to buy the contract.  When you are buying options, you can only have a limited downside and that is the premium that you pay for it.  In case of the $115 contract, your total loss could be a maximum of $19.3.  In case of the $130 contract, your total loss could be a maximum of $9.3. This is due to the fact that the chances of AAPL going to hit $130 is less than the chance of AAPL hitting $115. Therefore, option writers offer the lower probability contracts at a lower price.  Long story short, you do not pay for the Strike price. You only pay the premium and that premium keeps getting lower with and increase in Strike price(Or decrease if it is a put option). Strike price is just a number that you expect the stock or index to break. I would suggest you to read up a little more on pricing from here As other uses have pointed out, your example is unusual in that is does not include any time value or volatility value in the quoted premiums, the premiums you quote are only intrinsic values.  For well in-the-money options, the intrinsic value will certainly be the vast majority of the premium, but not the sole component. Having said that, the answer would clearly be that the buyer should buy the $40 call at a premium of $10.  The reason is that the buyer will pay less for the option and therefore risk less money, or buy more options for the same amount of money.  Since the buyer is assuming that the price will rise, the return that will be realised will be the same in gross terms, but higher in relative terms for the buyer of the $40 call.   For example, if the underlying price goes to $60, then the buyer of the $40 call would (potentially) double their money when the premium goes from $10 to $20, while the buyer of the $30 call would realise a (potential) 50% profit when the premium goes from $20 to $30. Considering the situation beyond your scenario, things are more difficult if the bet goes wrong.  If the underlying prices expires at under $40, then the buyer of the $40 call will be better off in gross terms but may be worse off in relative terms (if it expires above $30).  If the underlying price expires between $40 and $50, then the buy of the $30 will be better off in relative term, having lost a smaller percentage of their money. "When you buy a put option, you're buying the right to sell stock at the ""strike"" price. To understand why you have to pay separately for that, consider the other side of the transaction. If I agree to trade stock for money at above market rates, I need to make up the difference somewhere or face bankruptcy.  That risk of loss is what the option price is about. You might assume that means the market expects the price of AMD to fall to 8.01 from it's current price of 8.06 by the option expiration date. But that would also mean call options below the market price is worthless. But that's not quite true; people who price options need to factor in volatility, since things change with time. The price MIGHT fall, and traders need to account for that risk. So 1.99 roughly represents the probability of AMD rising to 10. There's probably some technical analysis one can do to the chain, but I don't see any abnormality of AMD here." You haven't said why you think you will gain at $41, but the graph never lies. Take it one piece at a time: At $41, your stock will lose a big chunk of value.  Your short calls will expire.  Your puts will gain a bit of value.  The stock's loss outweighs the option gains. Not to be a jerk, since I'm learning about options myself, but I think you have a few things wrong about your tesla put postion.  First, assuming it was itm or atm within a week of strike it would maybe be worth $12-15, I glanced at the 11/10 put strikes ~325 trades for $12.65 https://www.barchart.com/stocks/quotes/TSLA/options?expiration=2017-11-10  The closer it gets to expiry theta decay reduces put value significantly, the 325's that expire tomorrow are only worth $2.60.   Expecting TSLA to drop from 325 to 50 a share by Jan has a .006% chance of occuring according to the current delta. It's a lottery ticket at best.  _____ Lastly the $50 price is the expected share price at the date of expiry. The price you pay is 57c for the options. So in order to get to your 494k number TSLA would need to decline $50 dollars to a price of 275 a share. You wouldn't want to buy 50 dollar puts, just the 275 puts, provided it declines very quickly.   EDIT: I was looking at the recent expiration to get an idea of atm or itm prices, since it's not like you would hold to expiration. Also the Jan has a 0.6% chance of hitting 50, not .006%. That said what I've noticed when things start to slide is that puts have a weird way of pricing themselves. For example when something gradually goes up all of the calls go up down the chain through time frames, but puts do not in the same fashion. Further out lower priced puts won't move nearly as much unless the company is basically headed for bankruptcy. "This chart concerns an option contract, not a stock. The method of analysis is to assume that the price of an option contract is normally distributed around some mean which is presumably the current price of the underlying asset. As the date of expiration of the contract gets closer the variation around the mean in the possible end price for the contract will decrease. Undoubtedly the publisher has measured typical deviations from the mean as a function of time until expiration from historical data. Based on this data, the program that computes the probability has the following inputs: (1) the mean (current asset price) (2) the time until expiration (3) the expected standard deviation based on (2) With this information the probability distribution that you see is generated (the green hump). This is a ""normal"" or Gaussian distribution. For a normal distribution the probability of a particular event is equal to the area under the curve to the right of the value line (in the example above the value chosen is 122.49). This area can be computed with the formula:  This formula is called the probability density for x, where x is the value (122.49 in the example above). Tau (T) is the reciprocal of the variance (which can be computed from the standard deviation). Mu (μ) is the mean. The main assumption such a calculation makes is that the price of the asset will not change between now and the time of expiration. Obviously that is not true in most cases because the prices of stocks and bonds constantly fluctuate. A secondary assumption is that the distribution of the option price around the mean will a normal (or Gaussian) distribution. This is obviously a crude assumption and common sense would suggest it is not the most accurate distribution. In fact, various studies have shown that the Burr Distribution is actually a more accurate model for the distribution of option contract prices." "There's no free lunch. Here are some positions that should be economically equivalent (same risk and reward) in a theoretically-pure universe with no regulations or transaction costs: You're proposing to buy the call. If you look at the equivalent, stock plus protective put, you can quickly see the ""catch""; the protective put is expensive. That same expense is embedded in the call option. See put-call parity on Wikipedia for more: http://en.wikipedia.org/wiki/Put%E2%80%93call_parity You could easily pay 10% a year or more for the protection, which could easily eat up most of your returns, if you consider that average returns on a stock index might be about 10% (nominal, not real). Another way to look at it is that buying the long call and selling a put, which is a synthetic long position in the stock, would give you the put premium. So by not selling the put, you should be worse off than owning the stock - worse than the synthetic long - by about the value of the put premium. Or yet another way to look at it is that you're repeatedly paying time value on the long call option as you roll it. In practical world instead of theory world, I think you'd probably get a noticeable hit to returns just from bid-ask and commissions, even without the cost of the protection. Options cost more. Digressing a bit, some practical complications of equivalency between different combinations of options and underlying are: Anyway, roughly speaking, any position without the ""downside risk"" is going to have an annual loss built in due to the cost of the protection. Occasionally the options market can do something weird due to supply/demand or liquidity issues but mostly the parity relationships hold, or hold closely enough that you can't profit once expenses are considered. Update: one note, I'm talking about ""vanilla"" options as traded in the US here, I guess there are some somewhat different products elsewhere; I'm not sure exactly which derivatives you mean. All derivatives have a cost though or nobody would take the other side of the trade." In the scenario you describe, and really, in any scenario, by the nature of how option contracts work: a higher strike put will necessarily be more expensive than the lower strike put (everything else being equal). the lower strike call will necessarily be more expensive than the higher strike call (everything else being equal). In put options, the buyer has the right to sell stock for the strike price. So the higher the strike price, the more money the buyer of the put option can make by selling the shares of stock at a higher price. In call options, it's the exact opposite: buyers of the call option have the right to buy stock at the strike price. The lower the strike price, the better for the buyer: they have the right to buy stock for a lower amount of money. So it must be worth more. Think of it this way:  1) You buy 1k in call options that will let you buy 100k of stock when they expire in the money in a year.   2) You take the 99k you would have spent on the stock and invest it in a risk free savings account.  3) Assume the person who sold you the call, immediately hedges the position by buying 100k of stock to deliver when the options expire.  The amount of money you could make on risk free interest needs to be comparable to the premium you paid the option writer for tying up their capital, or they wouldn't have made the trade. So higher risk free rates would mean a higher call price.   NOTE: The numbers are not equal because of the risk in writing the option, but they will move the same direction. Option contracts typically each represent 100 shares. So the 1 call contract you sold to open (wrote) grants the buyer of that option the right to purchase your 100 shares for $80.00 per share any time before the option expiration date. You were paid a gross amount of $100 (100 shares times $1.00 premium per share) for taking on the obligation to deliver should the option holder choose to exercise. You received credit in your account of $89.22, which ought to be the $100 less any trading commission (~$10?) and miscellaneous fees (regulatory, exchange, etc.) per contract. You did capture premium. However, your covered call write represents an open short position that, until either (a) the option expires worthless, or (b) is exercised, or (c) is bought back to close the position, will continue to show on your account as a liability. Until the open position is somehow closed, the value of both the short option contract and long stock will continue to fluctuate. This is normal. "Defining parity as ""parity is the amount by which an option is in the money"", I'd say there may be an arbitrage opportunity. If there's a $50 strike on a stock valued at $60 that I can buy for less than $10, there's an opportunity.  Keep in mind, options often show high spreads, my example above might show a bid/ask of $9.75/$10.25, in which case the last trade of $9.50 should be ignored in favor of the actual ask price you'd pay.  Mispricing can exist, but in this day and age, is far less likely."