I am fairly new to spread trading and very often I find myself avoiding stocks which have wide bid/ask spreads. What about just excercising the option and selling or buying the stock.
When you exercise you lose any remaining time value so if it's greater than the bid/ask spread then you should not do it. Also take into account any exercise fees and commissions to close out the stock position.
You almost NEVER want to exercise an option. Click here for details: http://blog.mdwoptions.com/options_for_rookies/2008/11/exercising-an-option-is-it-a-good-idea.html Here's something crucial. Do not enter or exit a spread trade by trading the individual options (unless you want added risk in an attempt to generate extra profits). Enter an order to buy or sell the SPREAD, not the individual options. You will find that you don't have to pay as high as the ask price nor sell as low as the bid price when you enter a spred order. You can expect to be filled near the midpoint between the bid/ask prices for the spread. Not the midpoint - you will have to give up a few nickels - but 'near' the midpoint. Mark The Rookies Guide to Options
Right. And you also lose any POTENTIAL time value - such as you might get if the underlying moves back toward the strike. So even if there is no time value remaining, it's still not obvious that you want to early exercise.
If there's no time value and the option is OTM, then there's no reason to exercise. If the option is ITM and there's no time value or as MTE put it - the time value is less than slippage - then you may consider early exercise to close. YOU would not want the underlying to move toward the strike in this case.
I can see why that would seem to make no sense Don. But I meant what I said - if it were me I WOULD want the underlying to move toward the strike because at that point I would be delta-neutral against the underlying. If I were long 100 DITM puts with no time value, they would have a delta of -1.0 each, and I would undoubtedly by that point have locked in my profits by being long 100 futures. So if the futures moved back toward the strike and there was still some time left until expiration, my long options would pick up some premium (time value, gammas) and I would be a happy pappy. So if you were fortunate and patient enough for your options to have gone that DITM without having hedged, you could consider getting delta neutral against the underlying to lock in profits, rather than exercising. That way you retain the potential time value should the underlying move back toward the strike, which you give up when you exercise.
Right - rereading OP's Q. your answer is a good one. That's what I get for posting during RTH. The cost of holding the position should be considered and in a higher interest rate environment it would be a factor for equities or futures. Not right now ST, though,