Closing out option positions?

Discussion in 'Options' started by dylan57, Jan 5, 2008.

  1. dylan57


    Why would you excercise an option rather than closing it by an offsetting order? It seems like all I hear is about making money when you excercise an option. Like if you buy a january 45 call selling for 1.00 while the underlying is at 38.The next day the underlying rises to 40 and the option rises to 1.50. While you would have to wait til the underlying rises to $46 to break even if you were to excercise it, you could close the position now and make 50%. It seems to me that it would rarely make sense to excercise an option. Im not new to options, but not an expert either, so is there something Im missing here?
  2. Don't know where you are hearing all this talk about exercising - but you are correct.

    Like many option traders, I trade spreads so one has to look at all of the options in the spread, rather than one option. I sometimes close, let them expire, or auto - exercise. Usually, I close.

    Looking at your example, yeah I'd take the 1.50 unless I was still bullish. Even then it would be tempting to close part of the position or offset the risk somehow.

    Let's say that the underlying zoomed to 50. Now the option is worth at least 5. If you want to close and can get more than 5 that's what you do.

    But if the option is illiquid or it's close to expiry, then you may not be able to get 5, say, only 4.90 or 4.80. In this case it may make better sense to short the underlying @50 and hold or exercise or let the option auto exercise.
  3. ssmegner


    If you exercise you basically give away any remaining time premium. If you sell it you get the intrinsic and extrinsic. Unless there is some big dividend coming up that more than offsets the commissions and loss of extrinsic value there really is no need to exercise.
  4. bt116


    there are times where you want to exercise where dividends are concerened.

    with deep in the money options on futures, if you can't get better than intrinsic (when delta is basically 1) at times you want to exercise into futes and sell out the futes (provided this doesn't end up costing more).