I have question about exercising an option. Is it more profitable to exercise an option than to just sell the option back to the market? because when you exercise you pay the premium and the shares to buy the stock. Will this not always be the same amount than when you just sell the option to the market? Can someone explain with a example?
something like exercise call when upcoming dividend is greater than same strike put exercise put when interest cost is greater than same strike call
There is one big advantage I often utilize in exercising options. This only works with options in the money, with little, or no premium, which mostly means the day of, or before expiration. If for some reason the stock has moved significantly, most likely due to news, such as earnings the night before, or even pre 9:30 mkt open, Sometimes one could wait until the option opens for trading, but if the stock has dropped, say 8-10%, I will covert some long puts, to short stock, and then cover the stock, between 4-9 am.
In many cases, it is probably better to sell the option. If the option has little or no time value, you can sometimes get a little more by the exercise/stock trade. For example, S=100 and you hold the 95 call. Bid/Ask might look like 4.80/5.20. You try to sell the call for 5 and no takers. Or you could short the stock @100 and now have no risk. You can exercise to close if you want to and get 5 points for the call less costs. Some brokers charge fees for exercise, which makes selling the option the better choice in some cases - particularly with small scale trades.
A decision whether to sell the option or take the delivery of the underlying asset, should in my opinion, be based upon your expectation of what the underlying asset will do in the future. If you think the move is over, sell the option, if you expect a further move, then take the delivery. Naturally, if you accept the underlying asset you would have to manage the risk around that instrument.
I would only exercise the option at expiration when it's costly to sell... for instance when the bid/ask spread is too big and you can't sell it at intrinsic value... But you should exercise sometimes just before dividend... but know what you're doing...
No, right now the ES Sep. 30 2160 call is trading at about 5.75. ES is about 2144. If you bought the option and exercised, you'd pay 2160 + 5.75 premium = 2165.75. Compare that to the current market price = 2144. You'd want to sell any option with any time value. Only ITM options trading near zero TV should be considered for exercise.
Actually, in case of futures options, you should early-ex any option where your margin carry exceeds optionality. It applied to both puts and calls, i.e. if you have something that is deep enough ITM that cumulative margin interest is bigger then time value. It's been a while since we had anything like that in real life, obviously, with rates at zero.
That would only apply to puts in non futures options. Why would calls in futures options be different?
Because your delta is funding-neutral (since your are posting fixed margin that collects interest either way), so your early-ex decision is purely driven by the interest on the premium.