What Can You do with an Option?

Mark D Wolfinger on

June 2, 2010

What can you do with an Option?

When you buy an option, your plan it to earn a profit by selling it at a price that's higher than you paid. in that respect an option is no different from shares of stock.

But options are different and when you trade options, it's important to understand how to get out of any position.

When you own an option you have three choices

1) Sell the option. You will have a profit or loss

2) Exercise the option. This converts your right to buy or sell shares - into buying or selling those shares

In general, you should not plan to exercise. There is seldom a good reason for doing so.

3) Allow it to expire worthless

This is not the preferred choice, but sometimes an option cannot be sold (there is no bid)
If the option has no value, you do NOT want to exercise
If you still own the option when expiration day arrives, if you do nothing, it becomes worthless

When you sell an option you have fewer choices

1) You can exit the trade by repurchasing the option sold earlier. You will have a profit or loss

2) You can wait. Only two things can happen

a) The option expires worthless when it is not exercised by its owner

b) You are assigned an exercise notice and must honor the conditions of the contract

i. If it is a call option, you sell 100 shares at the strike price (the call owner buys your stock)

ii. If it is put option, you buy 100 shares at the strike price (the put owner sells stock to you)

Mark D Wolfinger

Expiring Monthly: The Option Traders Journal
http://www.expiringmonthly.com/

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