The Motley Fool Discussion Boards

Previous Page

Investing/Strategies / Options Beginners


Subject:  Re: Option Trading Date:  12/3/2012  10:37 PM
Author:  Zumba Number:  1110 of 1476

You don't need statistics, just look at any option chain where you can see extrinsic and intrinsic values.

For example, if you look at the March 13 calls on BWLD, the 65 calls have $8.26 in intrinsic value and $2.44 in time value (extrinsic value). The 70 calls have $4.04 left in time value (time value increases as you approach ATM, and decreases as the options get further ITM or OTM).

Exercising any of those calls would cause you to automatically lose the remaining time value. BWLD closed today at $73.26. You could sell the March 65 calls for $10.70 or so (prices are a bit off because it's after hours). But if you were to exercise the calls right now, you would take delivery of the stock at 65, then could turn around and sell it for $73.26 - for a gain of only $8.26

It might make sense to exercise early if the calls were very deep ITM, or if the stock pays a dividend and you want to exercise early to qualify for the dividend. But in the vast majority of cases, early exercise only causes you to lose time value. Better to just sell the long option and pocket the profit.

Copyright 1996-2018 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us