newbie option questions

Discussion in 'Options' started by failed_trad3r, Apr 1, 2010.

  1. I've exercised long options early in a couple cases.

    - when an option has such a low bid price (and is thinly enough traded) that I would have to sell the option for less than its intrinsic value. One time I had some options that were, I think, DJ 55 puts. When DJ got down to 50, I wanted to sell them. I couldn't get $5.10, or even $5. I think the bid was $4.80. Finally, when DJ got down to 49.85, my order to sell at $5 was filled. The person on the other side got $.15 for free. But I didn't have to give that $.15 up: If I had had enough margin, I would have cancelled my order to sell the options and would have bought an equivalent amount of DJ stock at any point below $50, then exercised the option, and overnight my stock would be sold at $50 and my option would have effectively been sold for $5 or more.

    - when you want to trade an option based on its expected value (because of the price of the underlying stock) but can't because it's after hours. Suppose you had some RIMM 75 puts last week. Minutes after its earnings report, RIMM dropped to 68.50. If you were afraid RIMM would recover somewhat by the time the market opened the next morning, and wanted to lock in your gains, you could have bought RIMM after hours at 68.50 and then exercised your 75 puts the next day, ensuring your options would be worth $6.50. (If RIMM recovers a lot by the next morning, you would probably make more money by instead selling the stock you bought the previous night, and the puts, after the market opens).
    RIMM did recover and opened at $70 the next morning. The 75 puts opened at just $5.40, although they did go higher later in the day.
     
    #11     Apr 2, 2010
  2. i see. now i get extrinsic versus intrinsic. btw what about dividends? they influence options only on ex-dividend right?

    the reason i ask this what if a company declares dividend of 50 cents 10 april and expiration is 16 april. then a put suddenly becomes worth 50 cents more and a call 50 cents less?
     
    #12     Apr 2, 2010
  3. donnap

    donnap

    I'll assume that you meant the stock goes ex-div on April 10.

    For American style options - if a .50 div was pending before expiry and there were no changes to the option prices - then you could put on a conversion - long stock, short call, long put same strike and expiry.

    This would allow you to capture the div risk free. Market doesn't allow free money. So the synthetic short (short call, long put) is adjusted by the .50.

    IOW you can approximate the difference made to the option price by delta x div. amount. So, if the call has a delta of .7, then it's price should be reduced by about .35 assuming that there's enough time value (extrinsic) to do that - and the corresponding put in the synthetic would be increased by .15.

    Note that the price difference in the options due to the div will cause changes to the delta.
     
    #13     Apr 2, 2010
  4. spindr0

    spindr0

    This is a really good point. Option positions can be supported outside of regular hours, particularly with earnings announcements where the price has moved dramatically and a reversal is a concern. You can lock in gains or in the case of a more complex spread, adjust the position to shift the risk graph (delta neutral).
     
    #14     Apr 3, 2010
  5. You must have been exercised by Martha Stewart, herself. :eek: :D :eek:
     
    #15     Apr 5, 2010
  6. spindr0

    spindr0

    I think that at that time, Martha had a new roommate who was exercising her :D :mad: :eek:
     
    #16     Apr 5, 2010

  7. That is an amazing insight for a rookie. And yet, it's so 'obvious.'

    You would be amazed to learn that the majority of beginners believe the world has come to an end if they are assigned an exercise notice.

    Mark
    http://blog.mdwoptions.com
     
    #17     Apr 8, 2010