Assume, the abc stock has current market price of 500 and i buy the in the money call option of it at strike price of 400, then i can immediately trade option contract and get stocks worth rate 500 at price of 400 and then sell it in stock market at 500, getting profit of 100 at the end.
So one can simply earn profit by buying option call at ITM strike price of stock. So im unable to understand this thing please clarify where im wrong.
You also need to factor in the cost of option acquisition.
Suppose you buy 400 CE at 105 when the stock is trading at 500. On expiration, you will be delivered the stock at Rs.400/- but the option will be exercised for which you have already paid a premium of 105. When an option is exercised, it ceases to exist and you can’t sell it on the market. Your total cost would be strike price + premium paid.
When I started learning about options I too thought that it was easy and guaranteed to earn money, but on further analysis, I realised my mistake. First of all, an option will only be exercised on the day of expiry and not before that. Even on the day of expiry, you try to implement the example of what you have suggested you will find that you need to pay the price of premium and the strike price which will be slightly more than the current price of the share. In which case you will actually lose money.
The problem is options theoretical knowledge everywhere on the internet says “you earn profit when underlying close above your strike price. Eg in 400 CE you will make profit when underlying closes above 401₹.”
It doesn’t teach things like premium, time decay, volatility, etc.
That’s why most people buy with such wrong assumptions which fades away with practical options trading experience.