Call option value, exercising or selling the option

S

stockoptionstrader

Hi Everyone,

I have a question and I don' know what to do.

I bought a call option on a stock ABC for an option premium of 9.50 $ at a strike price of 55$ and my option expires the 17th of january 2020. The current market price of the stock is 63.62 $. I see that I can sell my option for a premium bid price of 13.70 $ and an ask price of 14.50 $ and the latest premium price the option was sold was at 14.07 $.

This means that if I sell my option at the ask price the maximum profit I can get is 5 $ or 500 $ (14.5 - 9.50 = 5)

But if I exercise my option right now and then I sell immediately at the current market price I can get: 8.62 $ or 862 $ (63.62 - 55 = 8.62).

How is this possible and isn't it better to exercise the option first and sell the shares immediately at the current market price than to just sell the option? It seems I can get more money out of it (362 $) if I exercise my option.

Can someone explain?

TIA
 
You are confusing what you paid for the option with what you can get if exercised. If Exercised at $55 then sold you will get: (63.62 - 55) then - 9.5 = $-88. You would be giving up any time value so it would be a loss. All you would be getting is intrinsic from the exercise.
 
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As a FWIW you have a nice profit of 53% (if sold at $14.50) on the trade. You might think about closing it out and moving to the next one! :)
 
That's right it cost you $950+commission to buy the option.
If you sell it now you will get $1450 -commission.
So 500 minus 2x commission .
That's an expensive option you are better off with a spread..
That's $950 invested for nearly a year hopefully the stock keeps going up.
Always better to buy 2 cheaper options and sell one of it doubles then you have free money to ride on for the 10 months if that is how long you want to keep it
 
stockoptionstrader said:
Hi Everyone,

I have a question and I don' know what to do.

I bought a call option on a stock ABC for an option premium of 9.50 $ at a strike price of 55$ and my option expires the 17th of january 2020. The current market price of the stock is 63.62 $. I see that I can sell my option for a premium bid price of 13.70 $ and an ask price of 14.50 $ and the latest premium price the option was sold was at 14.07 $.

This means that if I sell my option at the ask price the maximum profit I can get is 5 $ or 500 $ (14.5 - 9.50 = 5)

But if I exercise my option right now and then I sell immediately at the current market price I can get: 8.62 $ or 862 $ (63.62 - 55 = 8.62).

How is this possible and isn't it better to exercise the option first and sell the shares immediately at the current market price than to just sell the option? It seems I can get more money out of it (362 $) if I exercise my option.

Can someone explain?

TIA
More...
What is the market in the put on the same strike in the same month?
Does the stock pay a dividend, if so, when and how much?

These are the questions you need to ask to determine if you exercise the call and then sell the stock or try and sell the call at a fair value above parity. What you paid make no difference except for taxes.
 
I think I understand, but can anyone explain with a rule of thumb in which case it is worth to exercise. Let's say I could have the option much cheaper like at a premium of 8 $, then it would be worth to exercise it first?

My reasoning is always that If I can exercise my option and with the value I have, less the price paid for the premium, if that is more than just selling my option I'm better of exercising it. Let's say in case the stock itself doubles. The value of exercising should always be about the same than when I just sell my option? If the stock doubles, I guess my premium must go much higher than just doubling but go like x5 or x6 or x... I don't know...
 
stockoptionstrader said:
I think I understand, but can anyone explain with a rule of thumb in which case it is worth to exercise.
More...

Sorry, but you don't. To determine in an option should be exercised early, there needs to be more value in owning the equity than the options. I'm not going to go into all the scenarios but this is the most typical. The day before a x-dividend date, if an ITM call is trading with less premium over parity than the value of the put, including the cost to carry the stock, you should consider exercising the call for the stock and buying the put. This does not consider tax consequences. Then you have the equity + put which is similar in risk reward to the call.

Your cost basis and the other items you brought up are not relevant.

BTW, just beacsue an ITM call has wide markets, it does not mean you can't find a buyer at a better price than the bid by working your order. You need to know what it worth and the midpoint is not always fair value. You will need to sell a little below fair value to get a MM to play. They do not need much.
 
stockoptionstrader said:
I think I understand, but can anyone explain with a rule of thumb in which case it is worth to exercise. Let's say I could have the option much cheaper like at a premium of 8 $, then it would be worth to exercise it first?

My reasoning is always that If I can exercise my option and with the value I have, less the price paid for the premium, if that is more than just selling my option I'm better of exercising it. Let's say in case the stock itself doubles. The value of exercising should always be about the same than when I just sell my option? If the stock doubles, I guess my premium must go much higher than just doubling but go like x5 or x6 or x... I don't know...
More...

Since, your option is a LEAP option into the future, why not sell options against it? Sell out of the money options on it in the current month March 2019. You would in effect be collecting premium. The risk is that the option you sell winds up in the money and your option gets exercised capping your gains. If it drops somehow and loses value, buy back the option you sold for much less and pocket difference. Rinse and repeat and keep collecting premium as long as you do not get called out. You would be reducing the cost of the premium you paid which is $9.50. If you sold an OTM call option for say $2.50, you would cut your cost basis to $7.00 for the option.
 
Stockoptionstrader, this is silly: do the math. Exercise and you buy the stock for $55. Add the $9.50 you spent for the right to buy it at $55, and that means you have $ 64.50 invested in a stock that's currently selling at a market price of $63.62, making this a losing trade. So if you did that you will have just turned a winning options trade into a losing stock trade; so don't do that.

Do the math, and then do what Mnewton and smallfil suggested, or something similar.

You've been lucky with your option - you picked a winner. Don't screw this up!
 
smallfil said:
Since, your option is a LEAP option into the future, why not sell options against it? Sell out of the money options on it in the current month March 2019. You would in effect be collecting premium. The risk is that the option you sell winds up in the money and your option gets exercised capping your gains. If it drops somehow and loses value, buy back the option you sold for much less and pocket difference. Rinse and repeat and keep collecting premium as long as you do not get called out. You would be reducing the cost of the premium you paid which is $9.50. If you sold an OTM call option for say $2.50, you would cut your cost basis to $7.00 for the option.
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Thanks smallfil.

I am not used to sell options, that's completely new for me and I'm a bit afraid of it because I don't know if I have to deliver the shares or what I have to do.

I'm with interactive brokers. Can I lose more money than I put in If I sell options? When do I have to deliver the shares? Do I have to have the underlying shares in my account? Does that happen automatically from my broker? It's really abstract for me to do this when I have never sold options before. You can also PM me.
 
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