Execution of options

Discussion in 'Options' started by Jeromek1, Feb 7, 2008.

  1. Jeromek1



    Im new at options (and trade too), and there is a question about options execution that I don't understand quiet well.

    - Why options are usually not executed even when the price of the stock is higher than the price of the strike?

    Thank you.
  2. Joe


    How would you make money then? Thats the whole point. The option to buy at the lower price than it currently is worth. It's a bet, a gamble and the more educated you are the more of a chance you have at getting it. People sell them because they think there is no chance of it reaching that point, and if it does, the seller looses money and the buyer makes it.
  3. I think your question is why options are not exercised early if they go in the money. The answer is because you can make more money selling the option than exercising it.

    Here's an eXtreme example. You know that even OTM options have time premium. Well, suppose a call option you own is slightly OTM and costs $2 in premium. It's worthless to exercise, but you could sell it and pocket $2, so if you want to liquidate it the obvious choice is to sell.

    Now, suppose that same option goes from slightly OTM to slightly ITM. Maybe it's 5 cents ITM and it's worth $2.10. Now, if you exercise the option and sell the shares you've got 5 cents. But if you sell the option you can get $2.10. Clearly, selling is the better choice.

    In general, as long as there is time premium remaining in an option, you are better off selling it than exercising it. And so is the guy who buys it from you. Exercising in that situation is throwing away money.

    Interestingly, this month someone assigned me on a bunch of covered calls that had 30 cents of time left. The stock has since dropped back below the strike price. I consider it a gift.
  4. mihalich


    cause they still have time value.

    But with ITM options you'll always expose yourself to the risk of early exercise.

    Even if nobody want them, ITM options will be automatically exercised at expiration.
  5. Jeromek1


    Thank for the response, know its my turn to assimilate the knowledge.