hello I have never traded or excercised options. I was wondering what are some risks involved in excercising options. Also I know that some options are in the money since the moment you buy them. It sounds too good to be true that you can just buy them and excercise them right away and make a profit can someone point me in the right direction. Thank you!!!!
The price of an In-the-money (ITM) option is composed of intrinsic and extrinsic value. For example, stock XYZ is currently at $45. The Nov 43 call is trading at $3.00. $45 - $43 = $2.00 intrinsic value (ITM). The extra $1.00 is the extrinsic value or time premium. So, you can't exercise the option and profit because you would be forfeiting the $1.00 extrinsic value.
in the example you gave is the stock in the money? I think not because of the 1.00 extrinsic extra. In some cases both the intrinsic and extrinsic values are covered. If so would one be able to excercise a profit with zero risk.
What makes it extrinsic is that it is NOT covered. Extrinsic is an extra premium that you pay above the options in the money value. Take a look at the calculation again. It is a $3.00 option that is in the money by $2.00. If it was instantly exercised on the day you bought it, you would have lost $1.00. I am 99% sure you will never find an option trading for less than it's in-the-money or intrinsic value. BTW, this talk about intrinsic/extrinsic value is literally baby steps. You better get a check/roger on this. Then learn about what optionality is composed of...mainly time and volatility. You better have enough money at expiration. Your broker can liquidate your position at unfavorable prices...within legality ofc...wink ...wink. Do it more than once and they will shut your account or prevent you from playing with matches ie selling naked options....which is where the real fun is.
But if you have to have 100 Stocks in order to excercise wouldn't it be better to just buy the stock?!! This is all very confusing.
The option gives you the right to buy the stock. You are fully participating on the upside for just a fraction of amount having to needed buy the stock. With options, you are able to employ leverage, sometimes extreme leverage, in much greater amounts than simply buying or selling stocks on margin.
So waiting for them to expire is pretty simple. How about if you wanted to excercise them. Are there legal or other concerns like in trading on margin?
You can exercise anytime. You just forego the extrinsic value of the option. And ofc, you need to have buying power in the account if you are taking delivery.