Can I exercise my right to buy the stock at any time up to the
expiration date?
As the holder of an equity call option, you can exercise your right
to buy the stock throughout the life of the option up to the exercise
cut-off time on the last trading day before expiration. Options
exchanges have a cut-off time of 5:30 pm, Central Time, for receiving
an exercise notice. However, most brokerage firms have an earlier
cut-off time that should be determined in advance since it may affect
when you receive delivery of the stock.
What is the difference between American-style exercise and European-style
exercise?
All standardized equity options use American-style exercise. American-style
exercise means that operationally you can exercise your contract any day that
the market is open before the expiration date. The last day to exercise an
American-style option is usually the third Friday of the month in which the
contract expires (expiration Friday). Most index options, however, use
European-style exercise. This means that the only time you can operationally
exercise your contract is the last trading day (usually Friday) before
expiration. Remember, even though there is only one day in which you can
exercise your contract, you can always close out your option position in the
secondary market any day prior to expiration.
Are all index options
European style exercise?
Not all index options are European style, but most index options, it does
seem, are European style. For example, the OEX S&P 100 index option is
American style. A primary reason that most cash-settled indexes are European
style is probably that since there is no actual delivery of the underlying the
whole concept of exercise is skewed. (Why exercise an option for cash, when
you can sell the option into the market and receive cash?) In addition, early
exercise causes serious timing imbalances for combination strategies using
cash-settled options.
A second reason might be the mechanics of establishing a settlement price. For
an American style index option like the OEX, a settlement price has to be
calculated every day and the mechanics of exercise seem to argue for using the
closing prices of the component stocks. But back in the 1980's the industry
moved toward using the opening prices of the component stocks for calculating
final settlement prices in order to reduce the volatility associated with the
'triple witching' phenomenon.
Important to remember: Thursday before Expiration is typically the last
trading day for European style index options!
If I exercise an in-the-money call option, how soon can I sell the stock?
As soon as you tell your broker you would like to exercise your right to buy
the stock (strictly speaking, given "irrevocable instructions") you are deemed
to be a stock owner. Because of the irrevocable nature of the call exercise,
you will be buying the stock at the strike price, and you can sell those
shares immediately after giving instructions to exercise.
If my option closes .05 in-the-money on expiration Friday, what is my
likelihood of being assigned? It may be profitable for an investor to exercise an option that is
in-the-money by as little as .05 and the option HOLDER has the right to
exercise his contract whether the option is in or out of the money. However,
for this example, the option is not in-the-money by The Option Clearing
Corporation's (OCC's) automatic exercise threshold, an investor is certainly
within his right to instruct their broker to exercise (or not to exercise)
their option contract. Investors who do not want to be subject to assignment
risk can simply close their expiring position.
Investors should consult with their broker concerning their brokerage firm's
exercise policy i.e. what is the firm's automatic exercise policy and the
firms deadline to submit exercise instructions? For more information in
regards to OCC's exercise policy, refer to The Risks and Characteristics of
Standardized Options, Chapter VIII.
Download the pdf version
of Characteristics of Standardized Options.
An excellent first read on the subject,
this book carefully and completely defines the terminology, explains options
investing step by step, and presents strategies so that it is easy to understand
at each level of risk involved.
Spend less than you earn! People who spend every penny
they make usually end up going broke.......
Take enough risk on the money you save! Playing safe by
putting your money under the mattress or in a savings account
will not make you wealthy..
Remember that.....Fully one-fifth of humanity, some 1.3 billion people,
struggles to survive on less than $1 per day. About 40% of
humanity survives on less than $2 per day. More than a billion
people around the world will go to bed hungry tonight. Life
expectancy in some 32 countries is less than 40 years. If you
have a few extra dollars in your pocket (you don't have to be a
millionaire to make a difference), please share some of your
financial good fortune with others who are in great need.
Think About It... Being in the 'now' brings a freedom, unlike living
in the past or in the future, which is a kind of imprisonment.
This isn't a kind of a denial where you pretend life doesn't have
problems. Life is full of problems, but most of those stresses
and failures are reliving old hurts or worrying about future
concerns. -- Carl Honore
When you 're diagnosed with cancer, you start to
bargain with God: "Let me get through this, and I'll take better
care of myself. I'll get my priorities in order. I'll learn to
live every day to the fullest." Isn't it sad that you have to get
sick before giving yourself permission to live life to the
fullest? -- Robert Schimmel
Look at Life in different & Positive ways
