Exercising Options

[oaksie100]

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? And if I do then I take it that the only way is to sell the contract back into the market at its new appreciated premium. Do you have to wait to find a buyer or does it go straight into the market and you get funds equal to its value?

Thanks for all ur help

Tom,

P.s. I'm not intending on trading options at the moment just educating myself with regards to them and couldn't find the answer to this question, thanks again!

 

[goshort]

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? And if I do then I take it that the only way is to sell the contract back into the market at its new appreciated premium. Do you have to wait to find a buyer or does it go straight into the market and you get funds equal to its value?

Thanks for all ur help

Tom,

P.s. I'm not intending on trading options at the moment just educating myself with regards to them and couldn't find the answer to this question, thanks again!

Oaksie

When you excercise an option you excercise the 'right' that you bought. when you bought the option If you bought a call say on MSFT at the the 30 strike price then if you excercised this right you would take delivery of 100 shares of MSFT at 30 - if you excercised your right. Normally you would only want to excercise if your objective in buying the option was secondary to the fact that you really wanted to own the underlying.

An example will help..

Lets say MSFT is trading at 27. You buy a Jan 30 call at 2, if on expiry the price has risen to 34 then your call will be worth 4 , you could sell the call back for 4 and pick up 2 profit or you could excercise the call and 'have the stock delivered to you' at 27. The effect is the same, you will have a 4 dollar immediate profit on the stock, but of course have to take into account the 2 you spent buying he call. So you are up 2 either way. With the excercise route, you own the stock and your profit is still in the market. If you sell the call back at 4 you get your profit and are done.

I hope this helps.

Rgds

Paul