I don’t understand warrants. Why can I sell calls for profit without reaching strike?

External question — Personal Finance Stack Exchange Author: user69725 Original post: https://money.stackexchange.com/questions/161821 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I understand the basic concept which is explained everywhere. But apparently this is not what happens. It is written everywhere, that the difference between strike price and actual stock price is my profit. So if I do a call, The stock price has to be above the strike price to take profits, right? Otherwise I would just get nothing. Despite that, I can just buy warrants and sell them whenever I want. Now, why is this? In my Online Broker I can trade them normally like stocks. Buy them, wait till the price rises, sell. I buy them and sell them. And I can make profit without ever reaching the strike price. I don’t understand the system. Please explain that :/

External answer — Personal Finance Stack Exchange Author: D Stanley Original post: https://money.stackexchange.com/a/161822 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. The stock price has to be above the strike price to take profits, right? To be picky, the stock has to be above the strike to get a payout . To make a profit, the payout you get has to be more then the premium you pay for the stock. But I think you meant a payout, not necessarily a profit. If the stock is below the strike at expiry , the option will expire worthless any your net loss is the premium you paid. You can still buy and sell warrants (analytically similar to "call options") even if the stock is below the strike before expiry . The reason is that you're betting that the stock price will rise and eventually be above the strike. If the stock price goes up, the chance is greater that it will be above the strike at expiry, and the warrant is more valuable (i.e. you can sell it for a profit before expiry). In other words, you might get a payout, and you might not. So you're paying for the probability of a payout. If that probability goers up, the value of the warrant goes up. As you get closer to the expiry date, the amount that the stock can realistically move decreases, so the change in the option value just based on the movement of the stock decreases. If the stock is far below the strike, the odds will be very small that it pays out, and the value will not change much. If the stock is near the strike, there's roughly a 50/50 chance that it will move above the strike, and the option will have some value. If it's already above the strike, the value will be close to the difference between the stock and the strike. That's a pretty simplistic view, and there's a lot of nuance, but that's the basic idea why options that are currently "out of the money" can still be traded and make a proft before expiry.