I am confused about exercising my long
option position. I believed a stock was going up and bought a 60
strike call for $2.00 when the stock was $59. Then, if the stock does
increase in value to $62 and my contract increases in value - to
$4.30, I understand I can make a profit by exercising the call. But
if I exercise the call, I have to buy 100 shares of the stock at the
strike price.
What if I only have $2000 in my account and the call is for 60
dollars - will my broker cover me?
In order to exercise a put or call, do I have to have cash or stock in my
account to buy (in the case of a call) or sell (in the case of a put) the
shares of stock that underlie the contract? One way to answer your question is to ask yourself, "Which provides the
highest price/lowest cost -- exercising the rights of the option contract OR
selling the contract back into the marketplace?" If you exercise an option,
the settlement will be in three business days, just like if you bought or sold
stock on an exchange. So for example if you exercised a call and
simultaneously sold the equivalent shares of stock, those transactions would
offset each other. Assuming the option is in the money there should be no need
to post margin for such a set of offsetting transactions. Of course, you will
want to check with your brokerage firm to ensure that you are both on the same
page regarding this practice.
My option expired 60 cents in-the-money. Would my broker "automatically"
exercise that option?
Each brokerage firm has a procedure that is spelled out in your account
agreement forms. Each customer should become familiar as to what those
procedures are. The option holder can always submit instructions to their
broker as to whether or not to exercise. There may even be a rare case in
which the customer decides that they do not want to exercise an in-the-money
option. It is best to have an understanding with your broker as to the actual
procedure. They may have a threshold that they impose for automatically
exercising customer orders. The Options Clearing Corporation ("OCC") uses the
25 cent threshold for customer orders, but your firm may have a different
threshold. Here is a description of the procedure:
EXERCISE BY EXCEPTION - "Exercise by exception" is an administrative procedure
used by The Options Clearing Corporation ("OCC") to expedite the exercise of
expiring options by Clearing Members. In this procedure options which are
in-the-money by specified threshold amounts are exercised unless the Clearing
Member submits instructions not to exercise these options. "Exercise by
exception" is a procedural convenience extended to OCC Clearing Members, which
relieves them of the operational burden of entering individual exercise
instructions for every option contract to be exercised. It is important to
note "exercise by exception"is a procedure between OCC and its Clearing
Members and is not intended to obviate the need for customers to communicate
exercise instructions to their brokers:
"The exercise thresholds provided for in Rule 805(d) and elsewhere in the
rules are part of the administrative procedures established by the Corporation
to expedite its processing of exercises of expiring options by Clearing
Members, and are not intended to dictate to Clearing Members which positions
in customers’ accounts should or must be exercised." (Rule 805, Interpretation
.02)
EXERCISE THRESHOLDS - Expiring options subject to exercise by exception
use the following thresholds to trigger exercise:
Equity options: .25 per contract in-the-money in the customer account; .15 per
contract in-the-money in firm and market maker accounts. Index options: $.01
per contract in-the-money in all account types. Expiring options are
determined to be in-the-money or not based on the difference between the
exercise price and the “closing price” of the underlying security.
The "exercise by exception" procedure for expiring options described above is
sometimes incorrectly referred to as "automatic exercise." It is important to
note "exercise by exception" always allows an OCC Clearing Member to effect a
choice not to exercise an option that is in the money by the exercise
threshold amount or more, or to exercise an option which has not reached the
exercise threshold amount. The exercise threshold amounts used in "exercise by
exception" trigger "automatic" exercise only in the absence of contrary
instructions from the Clearing Member. Because the right of choice is always
involved in "exercise by exception," exercise under these procedures is not,
strictly speaking, "automatic."
TO MINIMIZE THE POTENTIAL FOR ERROR CUSTOMERS SHOULD COMMUNICATE TO THEIR
BROKER OR CLEARING MEMBER EXPLICIT INSTRUCTIONS TO EXERCISE, OR NOT EXERCISE,
ANY EXPIRING OPTION CONTRACT.
I am confused about exercising my long
option position. I believed a stock was going up and bought a 60 strike call
for $2.00 when the stock was $59. Then, if the stock does increase in value to
$62 and my contract increases in value - to $4.30, I understand I can make a
profit by exercising the call. But if I exercise the call, I have to buy 100
shares of the stock at the strike price.
What if I only have $2000 in my account and the call is for 60 dollars - will
my broker cover me?
You may have forgotten that "exercising" and "closing" the option are two
alternatives for closing out your option position. What happens with most
options trades (on average, about 60% of the time) is that the option contract
is sold to close out their previously purchased contract instead of exercising
the contract and taking the stock position. If you bought the call for $2, and
the value of the contract rose to $4.30, you could enter an offsetting order
to sell the call option at the "new" higher price and pocket the difference in
premiums as a profit, less commissions of course.
This book describes just about every
fundamental strategy you could try with options. It covers the total return
concept of covered call writing, the pros and cons of option buying, examines
various types of spreads (vertical, calendar, and diagonal) and the various
delta (price) neutral strategies. If you have to have only one book on options,
this will be it.
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
