Why would someone buy a way out-of-the-money call option that's expiring soon?
I suggest you look at many stocks' price history, especially around earnings announcements. It's certainly a gamble. But an 8 to 10% move on a surprise earning announcement isn't unheard of. If you look at the current price, the strike price, and the return that you'd get for just exceeding the strike by one dollar, you'll find in some cases a 20 to 1 return. A real gambler would research and find companies that have had many earnings surprises in the past and isolate the options that make the most sense that are due to expire just a few days after the earnings announcement. I don't recommend that anyone actually do this, just suggesting that I understand the strategy. Edit - Apple announced earnings. And, today, in pre-market trading, over an 8% move. The $550 calls closed before the announcement, trading under $2. It could be that the contracts were bought at cheaper prices such as $.01 earlier in the day. What you see there with the bid and ask is the CURRENT bid and CURRENT ask. The high ask price means there is no current liquidity, as someone is quoting a very high ask price just in case someone really wants to trade that price. But as you said, no one would buy this with a better price on a closer strike price. The volume likely occurred at a different price than listed on the current ask. Out of the money options often have the biggest changes in value, when the stock moves upward. This person could also gain, by the implied (underlying) volatility of the stock rising if it moves erratically to either side. Still seems to be a very risky game, given only 4 days to expiry. The most likely explanation is that the calls are being bought as a part of a spread trade.  It doesn't have to be a super complex trade with a bunch of buys or sells. In fact, I bought a far out of the money option this morning in YHOO as a part of a simple vertical spread.  Like you said, it wouldn't make sense and wouldn't be worth it to buy that option by itself. Perhaps it was to close a short position.  Suppose the seller had written the calls at some time in the past and maybe made a buck or two off of them.  By buying the calls now they can close out the position and go away on vacation, or at least have one less thing they have to pay attention to.  If they were covered calls, perhaps the buyer wants to sell the underlying and in order to do so has to get out of the calls. I think the best answer that doesn't make the buyer look like a moron is this. Buyer had previously sold a covered call.  They wanted to act on a different opportunity so they did a closing buy/write with a spread of a couple cents below asking for the stock, but it dipped a couple cents and the purchase of those options to close resolved at 4 cents due to lack of sellers.
"There are two reasons why most options aren't exercised.  The first is obvious, and the second, less so. The obvious: An option that's practically worthless doesn't get exercised. Options that reach expiry and remain unexercised are almost always worthless bets that simply didn't pay off. This includes calls with strikes above the current underlying price, and puts with strikes below it. A heck of a lot of options. If an option with value was somehow left to expire, it was probably a mistake, or else the transaction costs outweighed the value remaining; not quite worthless, but not ""worth it"" either. The less obvious: An option with value can be cancelled any time before expiration. A trader that buys an option may at some point show a gain sooner than anticipated, or a loss in excess of his tolerance. If a gain, he may want to sell before expiry to realize the gain sooner. Similarly, if a loss, he may want to take the loss sooner. In both cases, his capital is freed up and he can take another position. And — this is the key part — the other end matched up with that option sale is often a buyer that had created (written) exactly such an option contract in the first place – the option writer – and who is looking to get out of his position. Option writers are the traders responsible, in the first place, for creating options and increasing the ""open interest.""  Anybody with the right kind and level of options trading account can do this. A trader that writes an option does so by instructing his broker to ""sell to open"" a new instance of the option. The trader then has a short position (negative quantity) in that option, and all the while may be subject to the obligations that match the option's exercise rights. The only way for the option writer to get out of that short position and its obligations are these: Not by choice:  To get assigned. That is to say: a buyer exercised the option. The writer has to fulfill his obligation by delivering the underlying (if a call) to the option holder, or buying the underlying (if a put) from the option holder. Not by choice: The option expires worthless. This is the ideal scenario for a writer because 100% of the premium received (less transaction costs) is profit. By choice: The writer is free to buy back exactly the same kind of option before expiry using a ""buy to close"" order with their broker. Once the option has been purchased with a ""buy to close"", it eliminates the short position and obligation.  The option is cancelled.  The open interest declines. Options thus cancelled just don't live long enough to either expire or be exercised." "As already noted, options contain inherent leverage (a multiplier on the profit or loss). The amount of ""leverage"" is dictated primarily by both the options strike relative to the current share price and the time remaining to expiration. Options are a far more difficult investment than stocks because they require that you are right on both the direction and the timing of the future price movement. With a stock, you could choose to buy and hold forever (Buffett style), and even if you are wrong for 5 years, your unrealized losses can suddenly become realized profits if the shares finally start to rise 6 years later. But with options, the profits and losses become very final very quickly. As a professional options trader, the single best piece of advice I can give to investors dabbling in options for the first time is to only purchase significantly ITM (in-the-money) options, for both calls and puts. Do a web search on ""in-the-money options"" to see what calls or puts qualify.  With ITM options, the leverage is still noticeably better than buying/selling the shares outright, but you have a much less chance of losing all your premium. Also, by being fairly deep in-the-money, you reduce the constant bleed in value as you wait for the expected move to happen (the market moves sideways more than people usually expect). Fairly- to deeply-ITM options are the ones that options market-makers like least to trade in, because they offer neither large nor ""easy"" premiums. And options market-makers make their living by selling options to retail investors and other people that want them like you, so connect the dots. By trading only ITM options until you become quite experienced, you are minimizing your chances of being the average sucker (all else equal). Some amateur options investors believe that similar benefits could be obtained by purchasing long-expiration options (like LEAPS for 1+ years) that are not ITM (like ATM or OTM options). The problem here is that your significant time value is bleeding away slowly every day you wait.  With an ITM option, your intrinsic value is not bleeding out at all. Only the relatively smaller time value of the option is at risk. Thus my recommendation to initially deal only in fairly- to deeply-ITM options with expirations of 1-4 months out, depending on how daring you wish to be with your move timing." 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. Options can have a negligible time premium. For American1 calls the time premium is never negative. If it had a negative premium it would be profitable to exercise it immediately. A deep in the money call has a delta of exactly one. That is, it's price movements completely mirror the price movements of the underlying stock. That means an option seller can buy stock and completely hedge his short option position. The seller of the option may be in an position to buy with very little margin and take your money and invest it. For example, consider a stock trading at $7.50, with its January 2014   $4 call option trading at $3.50. For one option, representing 100 shares, a trader could take your 350 dollars and invest it, and only use a small portion of the money to buy the stock on margin. Market-makers can typically borrow money at very low interest rates. If you have high borrowing costs, or are unable to buy on margin, then buying deep in the money calls can be a good strategy. Long story short, option sellers are making money off selling these deep in the money calls even with almost zero time premium. So, in general, there's no way to make money by buying them. 1. An American call is a call that can be exercised at any time up to and including its expiration date. "Options are generally viewed as having two types of value: ""Intrinsic value"" and ""time value.""  The intrinsic value is based on the difference between the strike price on the option and the spot price of the underlying.  The time value is based on the volatility of the underlying and the amount of time left until expiration.  As the days pass toward expiration, the time value generally decreases, and the intrinsic value may move up or down depending on the spot price of the underlying. (In theory, time value could increase at some points if the volatility is also rising.) In your case, it looks like the time value is decreasing faster than the intrinsic value is increasing. This may happen because the volatility is also going down (as suggested in the answer by CQM) or may just happen because the time to expiration is getting shorter at equal volatility. As noted by DumbCoder in a comment to the original question, the Black-Scholes formula will give you more analytical insight into this if you're interested." "During market hours, there are a lot of dealers offering to buy and sell all exchange traded stocks. Dealers don't actually care about the company's fundamentals and they set their prices purely based on order flow. If more people start to buy than sell, the dealer notices his inventory going down and starts upping the price (both his bid and ask). There are also traders who may not be ""dealers"", but are willing to sell if the price goes high enough or buy if the price goes low enough. This keeps the prices humming along smoothly. During normal trading hours, if you buy something and turn around and sell it two minutes later, you'll probably be losing a couple cents per share. Outside normal market hours, the dealers who continue to have a bid and ask listed know that they don't have access to good price information --  there isn't a liquid market of continuous buying and selling for the dealer to set prices he considers safe. So what does he do? He widens the spread. He doesn't know what the market will open tomorrow at and doesn't know if he'll be able to react quickly to news. So instead of bidding $34.48 and offering at $34.52, he'll move that out to $33 and $36. The dealer still makes money sometimes off this because maybe some trader realized that he has options expiring tomorrow, or a short position that he's going to get a margin call on, or some kind of event that pretty much forces him to trade. Or maybe he's just panicking and overreacting to some news. So why not trade after hours? Because there's no liquidity, and trading when there's no liquidity costs you a lot." Think of it this way, if you traveled back through time one month - with perfect knowledge of AAPL's stock price over that period - which happens to peak viciously then return to its old price at the end of the period - wouldn't you pay more for an American option? Another way to think about options is as an insurance policy.  Wouldn't you pay more for a policy that covered fire and earthquake losses as opposed to just losses from earthquakes? Lastly - and perhaps most directly - one of the more common reasons people exercise (as opposed to sell) an American option before expiration is if an unexpected dividend (larger than remaining time value of the option) was just announced that's going to be paid before the option contract expires.  Because only actual stockholders get the dividends, not options holders.  A holder of an American option has the ability to exercise in time to grab that dividend - a European option holder doesn't have that ability. Less flexibility (what you're paying for really) = lower option premium. When you buy a futures contract you are entering into an agreement to buy gold, in the future (usually a 3 month settlement date).  this is not an OPTION, but a contract, so each party is taking risk, the seller that the price will rise, the buyer that the price will fall.  Unlike an option which you can simply choose not to exercise if the price goes down, with futures you are obligated to follow through. (or sell the contract to someone else, or buy it back)  The price you pay depends on the margin, which is related to how far away the settlement date is, but you can expect around 5% , so the minimum you could get into is 100 troy ounces, at todays price, times 5%.  Since we're talking about 100 troy ounces, that means the margin required to buy the smallest sized future contract would be about the same as buying 5 ounces of gold.  roughly $9K at current prices. If you are working through a broker they will generally require you to sell or buy back the contract before the settlement date as they don't want to deal with actually following through on the purchase and having to take delivery of the gold.  How much do you make or lose? Lets deal with a smaller change in the price, to be a bit more realistic since we are talking typically about a settlement date that is 3 months out. And to make the math easy lets bump the price of gold to $2000/ounce.  That means the price of a futures contract is going to be $10K   Lets say the price goes up 10%,  Well you have basically a 20:1 leverage since you only paid 5%, so you stand to gain $20,000. Sounds great right?  WRONG.. because as good as the upside is, the downside is just as bad.  If the price went down 10% you would be down $20000, which means you would not only have to cough up the 10K you committed but you would be expected to 'top up the margin' and throw in  ANOTHER $10,000 as well.  And if you can't pay that up your broker might close out your position for you. oh and if the price hasn't changed, you are mostly just out the fees and commissions you paid to buy and sell the contract.  With futures contracts you can lose MORE than your original investment.  NOT for the faint of heart or the casual investor.  NOT for folks without large reserves who can afford to take big losses if things go against them.  I'll close this answer with a quote from the site I'm linking below The large majority of people who trade futures lose their money.   That's a fact. They lose even when they are right in the medium term,   because futures are fatal to your wealth on an unpredicted and   temporary price blip. Now consider that, especially the bit about 'price blip' and then look at the current volatility of most markets right now, and I think you can see how futures trading can be as they say 'Fatal to your Wealth' (man, I love that phrase, what a great way of putting it)  This Site has a pretty decent primer on the whole thing. their view is perhaps a bit biased due to the nature of their business, but on the whole their description of how things work is pretty decent.  Investopedia has a more detailed (and perhaps more objective) tutorial on the futures thing.  Well worth your time if you think you want to do anything related to the futures market.