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Author: kthor Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1207  
Subject: Option Trading Date: 11/28/2012 4:54 PM
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Bought my first option after 25+ of investing LOL
my question is , Iam sitting on a $800 profit, would like to exercise the option to buy the stock, but my confusion lies to what will happen to the $800 profit I have now? will it be credited toward the purchased of the stock? or should i just close the position and take the $800 profit?

Thanks
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Author: Zumba Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1106 of 1207
Subject: Re: Option Trading Date: 12/3/2012 2:32 PM
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if you exercise the option you will lose the profit. Sell the call, pocket the money, then apply that money towards the purchase of the stock.

Basically, it almost never makes sense to exercise early because you leave a lot of time value on the table.

Paul

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1109 of 1207
Subject: Re: Option Trading Date: 12/3/2012 6:19 PM
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Zumba,

You wrote, if you exercise the option you will lose the profit. Sell the call, pocket the money, then apply that money towards the purchase of the stock.

Basically, it almost never makes sense to exercise early because you leave a lot of time value on the table.


So you think the time-value of an option always trumps fundamental value? That seems very naive.

It might be true on average; but I doubt it works every time. Do you even have any data showing this is true on average?

BTW, I studied options years ago; but I've not found them very useful, given my investment strategy so I have little practical experience with them. But before I would take any advice like that, I'd want to at least see some statics to back up the claim. So do you know of any?

- Joel

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Author: Zumba Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1110 of 1207
Subject: Re: Option Trading Date: 12/3/2012 10:37 PM
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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.

Paul

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1111 of 1207
Subject: Re: Option Trading Date: 12/4/2012 12:11 AM
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Zumba,

You wrote, Exercising any of those calls would cause you to automatically lose the remaining time value.

Also, It might make sense to exercise early if the calls were very deep ITM... Better to just sell the long option and pocket the profit.

So you're simply arguing that it's better to sell the option vs. exercising. I suppose I accept that.

- Joel

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Author: Zumba Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1112 of 1207
Subject: Re: Option Trading Date: 12/4/2012 8:53 AM
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yes, that's exactly what I'm saying. It rarely makes sense from a profit standpoint to exercise an ITM option early. If you want to own the stock, it's almost always better to sell the option for a profit, then use that money to buy the stock.

Paul

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