Question about options and exercising them

Discussion in 'Options' started by overkil2, Dec 11, 2009.

  1. overkil2


    I'm pretty new to options and had a question about spreads.

    Let's take an example.

    Buy 111 Call of SPY for 2.36
    Sell 112 Call of SPT for 1.82

    to keep it simple, let's assume 1 contract.

    If the stock doesn't go past 112 I know I keep the premium on the 112 Call, but say it goes to like 111.85. Can I exercise my option and sell the stock immediately without having the $11,100 in my account?

    sorry for the newbiw question.
  2. hlpsg


    I think you mean to hold to expiration. Not a good idea because you never know what the underlying will do the next morning when the component stocks of SPY opens up. If you were up profit and the next morning the SPY components were to open down, you'd have a loss sitting on your hands. It's better to just close out the position before trading for that month halts.

    Secondly, yes you can exercise the 111 Call but no one does that if he does not want delivery of the stock. Exercising the option costs money in transaction costs at most brokerages too.

    If you're exercising before expiration, you immediately lose whatever time value left in the option. If you're talking about expiration, the brokerage immediately exercises it for you if it's ITM by a certain amount. However you're left guessing where SPY will settle the next day and you might have a profit or a loss depending purely on luck, and you don't want that.
  3. overkil2


    Thank you for your response.
  4. MTE


    Yes, you can exercise and sell, but if you exercise early then you lose any remaining time value that is left in the option. So you are better off selling the option, but you would also have to buy back the short option.

    SPY options trade till the close on expiration Friday so you can close out at any time.
  5. MTE



    What you are talking about is a problem in SPX and other index options that settle on the opening print.

    SPY and its options trade all through expiration Friday so you really don't have much of a problem.
  6. overkil2


    Thanks again for everyone's help.

    The most that I have done thusfar is covered calls and selling puts to get a stock at a good value should it be exercised. I've been reading a lot more about options, but still trying to digest it all.
  7. hlpsg


    Hi MTE, thanks, didn't know that. Haven't used SPY a lot so it's good to know.

  8. The answer is:

    Yes, you can exercise and sell the shares.

    But you cannot do that before the option expires. If you do, you would be naked short the 112 calls, and surely that's too risky for you.

    In addition, as already mentioned, you would lose remaining time premium in your long 111 call option.

    The proper way to exit this trade is to sell the spread when you are satisfied with the profit.