Hi Mark: Hello Irene.
I am very impressed with the answers you give to the questions. This is exectally what I have been looking for
in trying to understand the action of options. Thanks. I'm happy to help.
What is the difference between reselling a stock option to close a trade vs exercising an option?
First the terminology: You don't 'resell' the option, you 'sell' it.
When you sell an option, you collect cash. You have a profit or a loss, depending on whether your purchase price or your sale price is higher. This is a very simple process and it works exactly the same as when you buy or sell stock.
Exercising an option is something that's important to understand. But, you may go through your entire lifetime trading options and NEVER find any reason to exercise an option.
When you exercise, your option in canceled. If it's a call option, you buy 100 shares of the underlying stock. You pay the strike price per share. Thus, if you exercise one IBM Jan 90 call, you pay $9,000 and you own 100 shares of stock. For the typical individual investor who buys options, there is seldom a good reason to exercise. If you no longer want to own the option - sell it.
If it's a put option, you sell 100 shares of stock, collecting the strike price per share. Thus, if you exercise one MSFT Jan 30 put option, you sell 100 shares of MSFT and collect $3,000 cash. If you do not own the shares, then you will find yourself short 100 shares. Again, there is almost never a good reason to exercise. Sell your option instead.
Is it the broker that exercises the option if he assigns the stock to you? The OCC (Options Clearing Corporation) issues 'assignment notices' to individual brokers. If your broker receives such a notice, they have a method for selecting which of their customers receives that notice. Usually it's a random process. But - obviously, only those customers who have sold that option and are still currently short that option can be assigned one of those notices.
To reply to your question - no, it is not the broker. It is a customer (or professional) trader - perhaps someone just like you who decides to exercise the option. If that investor exercises, the OCC takes over and completes he process. They notify a broker who notifies one of its customers that an option he/she is short, has been exercised. That person must honor the conditions of the option contract. If it's a call option, the person assigned must deliver (sell) 100 shares at the strike price. If it's a put, the assignee buys 100 shares.
When do you as the owner of the option exercise the option? ANY TIME that you want to do so. That is the right of an option owner. But, as I said, there is really no good reason for you to ever exercise the option - unless you want to have a position in the stock. When expiration arrives and you still own the option, if it is in the money it will be automatically exercised for you. To prevent that, sell the option.
I get the two confused. I hope this helps. If not, please write again.
Thank you so very much My pleasure. Take a look at my blog, where I answer questions and post opinions and educational material targeted (mostly) to the options rookie.
Irene
Mark
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Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options
website: http://www.mdwoptions.com
blog: http://blog.mdwoptions.com/options_for_rookies
Free eBook: http://www.mdwoptions.com/freebook.pdf