newbie option questions

WHat happens if you write a 1 year put-call

for example out april ´11

and its becomes in the money, then can people exercise it? so than you have to reserve money to buy 100 shares of a stock? How much margin u then need?




also why do options have 0,05 tick size??:eek:

 

there is a margin calculator on the cboe website:

http://www.cboe.com/tradtool/mCalc/default.aspx

You might get exercised but its not likely untill you get much closer to expiration or very deep ITM because that would forfeit all the time value component of the option.

 

Thanks for the calculator!

I don't exactly understand what you're saying, since I am the writer should I not be happy that time value gets forfeited, isnt the buyer from my option more willing to exercise since he is the one losing the time value premium, not me?

 

It happens rarely in the real world because it just doesn't make financial sense for the option buyer to exercise the option when there's still time premium on the table.

 

1) You will never be exercised early when there is a lot of "extrinsic value" remaining in the option, especially with a longer-dated option.
2) Early exercise is more likely to come about when an impending dividend payment is slightly greater than the remaining extrinsic value, especially with a shorter-dated option.
3) You'll never meet anybody who brags about the "free money" they have earned from early exercise of short-option positions.

 

Selling options with no or little time value is stupid.

 

what do you generally think is a good timeframe to be wary of early exercise? 7,10,14 days before expiration? 4 weeks? 8 weeks? If it's 7 days before expiration i would think theres not much premium on the table anymore for the option buyer and much less possible movement of the underlying your way. So there would be higher chance of early exercise of ITM options, am i right?

 

If the option is 1 pt ITM and it's worth $1.50, why would the holder take $1 via exercise when he can sell the option for $1.50 ???

In addition, at most firms, exercise ISN't free. Why would he incur an extra commissions via exercise as well?

 

It depends. You'll very likely get an early exercise when the option is DITM with next to no time value left and an impending dividend.