Excercising = Buying/Selling shares?

Discussion in 'Options' started by CashProfits, Sep 12, 2009.

  1. Say a stock is at $10.

    I want to buy 20 Jan 11 puts with a strike of $7.50 for $0.18

    I also want to but 20 Jan 11 calls with a strike of $11.00 for $0.08

    If I exercise either of the contracts ITM I should just make the profits with no issues correct? I will not be physically given the shares to buy or sell on the market right?

    I am under the impression that if you excersise either one of these positions OTM, only then would I actually be granted 2,000 shares that I would then have to buy/sell on the market.

    My concern is because my account is only worth $10,000. So even if the price was to go down to $7.00 and I chose to excercise, if I am physically given 2,000 shares to buy back that is $14,000 worth the shares when I only have $10,000.

    Can someone clarify to me if this is an issue that is specific from broker to broker or if there is a global "rule" that options brokers follow in this situation.
     
  2. Why would you necessarily want to exercise the calls or puts? If the stock moves enough in either direction for you to have a profit on the options, you can just sell to close the position.

    If you exercise the calls you will get the stock at $11 - if you exercise the puts, you will sell the stock for $7.50 - these are both whatever the current value of the stock is.

    That being said, it normally makes sense for the retail call/put buyer to just sell back the options to get their money, not exercise them. BTW - the premiums listed in your example would seem very low to me - it would have to be a low IV stock to have 11 strike calls for Jan 11 on a $10 stock that only cost .08.

    JJacksET4
     
  3. Mark
    http://blog.mdwoptions.com
     
  4. OP, what you end up buying or selling via exercise and assignment is the same industry wide. It does not vary from broker to broker. The strike price determines the cost of acquisition..

    If you have no previous position, in your examples, if your option is ITM and you exercise, you are either going to buy the shares at 11 (long) or sell them at 7.50 (short). Profit and loss will be determined by the price you cover the shares at.

    It makes no sense to exercise options to acquire a long or short position unless you want that equity position. Otherwise, just sell the option (to close) to take profit or salvage time premium.

    Regarding your account value of $10,000, you would have some issues in a cash account as well as if you have less than the 50% margin required for purchase/sale.

    With all due respect, if you're asking such basic questions, I'd read a lot more before going into the deeper end of the option pool :)
     
  5. Ok so If I do "sell/buy to close" either of these positions I probably won't be able to do it my current amount of cash?
     
  6. You must be confused with the terminology. Buy to close only makes sense if you are short options.

    Sell to close if you are long options.


    Buy to close does not mean you are buying stock.


    To exercise you have to notify your broker, there is no button that does this. But if you are long a call option and even if it is OTM and you do not want any chance of ending up with stock (call on the telephone not email) and give him a do not exercise instruction you will end up long stock.


    IF you bought a call option and it is in the money all you need to do is sell to close your position and you collect the remaining time value and whatever intrinsic value gained.


    I think you should not do options and go read some basic materials.

    Look for that book you got in the mail called "Characteristics and risks of standardized options"

    And read chapters I, II, III, VIII, X

    and look through the two supplements


    Also the prices make no sense.

    how the heck can an option only cost 8 cents for a stock trading at 10 (1 dollar OTM) and your long a call option with a strike of 11 that has time value till 2011 January?


    What are the symbols for those calls? I dont think they exist, more like a bad theoretical example?

    potential 1,250% gain if this sucker goes up a just a little bit :)

    1600 dollar position (200 contracts) turning into 20 Grand if the stock goes 1 dollar ITM and you have 496 spins on the wheel to go :)
     
  7. Technically, "buy to close" refers to closing a short option and "buy to cover" refers to closing a short equity position. However, if we were talking about a stock position and you said either one, I'd know what you were talking about, despite the mild infringement of politically correct lingo :)

    Initial margin is 50% so in your example where you are exercising the calls, you could not buy the stock since its cost exceeded 50%. An exception to this is the Pattern Day Trader Rule where you get 25% (4:1) intraday margin but that requires a minimum of 25g in your account.
     
  8. Interactive Brokers offers a "button" that enables you to exercise - no phone call or E-mail needed. I don't know if other trading platforms offer the same...
     
  9. I know what the buy/sell to close terminolgy in relation to long or short but I'm just confused as to what the process is when you do buy/sell to close.

    So if I bought both 20 calls and 20 puts...

    I'de be looking to "buy to close" once the price dropped well below the put $7.50 strike price.

    OR

    looking to "sell to close" once the prices rises well above the call $11.00 strike price.

    ^^^I have that part down^^^

    My question is...

    Even though the position will only run me $520 for both 20 calls and 20 puts, do I need $14,000 if I choose to "buy to close" once the price drops to $7.00 ($0.50 below the the put $7.50 strike)?

    Or visa versa if the price goes to $12.00 ($1.00 above the call $11.00 strike) would I need $24,000 in order to "sell to close"?


    Above you stated that "when you buy to close it does not mean you are buying stock". With that being true, my max risk is $160 for 20 puts with a $7.50 strike paying a $0.08 premium. Yet if this stock drops to $7.00 would or wouldn't I need $14,000 to close the position and take profit if I "buy to close"?
     
  10. Cash,

    Sorry, but you are really confused here. In the first place in the example, you BOUGHT TO OPEN both CALLS and PUTS.

    Now, if the stock is over $11 or under $7.5, you would SELL TO CLOSE either the calls or puts.

    I think you are getting confused thinking that you need to buy the puts or something - in the example, you already own the puts. They will show up in your account as "+20" or "20" puts. You are long the puts at that moment. Now, you don't need any money in your account per se to sell them.

    So to open the straddle:
    BUY TO OPEN 20 CALLS - Cost $premium amount
    BUY TO OPEN 20 PUTS - Cost $premium amount

    Now, if:
    Stock moves to say $12:
    SELL TO CLOSE 20 CALLS for whatever they are worth (at least $100 each at this point). The puts would have $0 value so just keep them.

    Stock moves to say $6.50:
    SELL TO CLOSE 20 PUTS for whatever they are worth (at least $100 each at this point). The calls would have $0 value so just keep them.

    Hopefully this helps a bit, but keep learning before doing anything!

    JJacksET4
     
    #10     Sep 14, 2009