Exercise Question

Discussion in 'Options' started by spindr0, Mar 20, 2007.

  1. spindr0


    I've been tinkering with options for 20+ years and have been assigned countless times. But believe it or not, I have never exercised a position. So let's treat this like a newbie question :)

    I trade a variety of ratio calendars and strangles for earnings. Two weeks ago, I had a leftover position from a reverse calendar ratio straddle where the bid of the long near month call was 60 cents or so under parity. Yep, highway robbery! That 60 cts was a chunk of profit to give up.

    The particulars were something like:

    $37.40 - 37.45 stock
    1.85 - 2.45 Mar 35 call (+4)
    3.60 - 3.70 Apr 35 call (-5)

    Closing the options at the respective B/A's would have been at a debit of $11.10 (+4 * 1.85 -5 * 3.70)

    Am I missing something or wouldn't it have been a better idea to exercise the 4 long Mar 35 calls to obtain the stock for 35 and simultaneously shorting 400 shares at 37.40 netting 9.60 (+4 * 2.40) and covering the 5 short Apr 35 calls @ 3.70 (-18.50) thereby having a total debit of only $8.90 ? ($2.20 better)

  2. MTE


    Yes, when the option is trading below parity you could exercise it, assuming the exercise fees and commissions don't eat away the advantage, but at 0.6 under parity it would be hard to lose out even with an exercise fee and commissions on the stock trade.