Seeking advice on Options

Discussion in 'Options' started by Trading Monk, Jun 1, 2001.

  1. Is it generally better (ie. cheaper) to exercize an in-the-money Call or to resell it?
    Any advice from experienced traders would be greatly appreciated.
     
  2. Generally speaking, unless you have a desire to own or be short the underlying stock, you're better off reselling an option that is in the money. In the end the net profit comes out about the same both ways. For instance, if you have a 50 call on a stock that is trading at 60 and you paid a $5 premium for the call, your option at expiration is going to be worth $10, and you'll be looking at a $5 per contract profit. If you resell the option you'll pocket the $500 profit. If you exercised the option you'd be buying the stock at 50, which you could turn around and sell on the open market at 60, for a 10 point profit. However, you paid $500 for the option originally, which means that your net profit on the stock is still $500.

    Most option traders close out their option positions and take their profits, rather than deal with exercising them, which adds no profit to the trade.
     
  3. If you exercise the option, you also have the risk of holding the stock. Especially if you let the option get exercised via expiration (automatic for options 0.75 in-the-money at expiration), you hold the risk of carrying the stock over the weekend. Also, if you sell the option before expiration you will probably get some extra time value out of it. However, if you were to exercise it before expiration you would lose that time value.
     
  4. def

    def Interactive Brokers

    One other thing you can try if the spread on the option is wider than the underlying stock is to short the underlying stock on the date of expiration and when the option settles you would be flat. You'll have to calculate to costs of commissions into the fold but as deep in the money options are often illiquid, you may be better off following this strategy.
     
  5. dlincke

    dlincke

    The strategy def points out above can also be a great idea when dealing with a volatile when the option is not deep ITM since in addition to locking in the expiration value of the call you get a risk-free shot to the downside.
     
  6. Interesting idea, Def. I hadn't considered that.
     
  7. Thanks everyone for sharing your views.
     
  8. LMeyers

    LMeyers

    Can someone tell me which stock price (opening, closing or some other) is used as the settlement price on option expiry Fridays. Thanks a lot.
     
  9. def

    def Interactive Brokers

    depends on the product. stock options use the closing price. A couple of the indices have AM expirations which is calculating by the opening price of all the stocks in the index.