The Rules for Exercising Options
Why is it that the option is worth $7.30, which is $2.30 more than the $5 discount it provides? Is this normal?
Yes. That additional $2.30 is called time value or extrinsic value. It exists because there is still time left in the option’s life (22 days here), during which the price of Apple could go higher. And the simple fact is that selling any option allows you to collect the time value it contains, while exercising the option means that you are throwing away that time value.
The amount of time value in each option varies, from zero to a huge amount. Knowing the factors that control the amount of time value in options is an important key to option trading, and that’s a much bigger subject than we have space for today. But now you know this much: exercising options that contains time value in them is not recommended. No matter what you want to do with the stock, you are better off to sell the option, and then do the stock transaction.
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