Exercise Call, Buy Stock and Sell Immediately

[KAWill70]

I'd like to understand how to exercise an In-The-Money Call at third Friday expiration and immediately sell the stock.

I realize that many traders would simply sell the call at a profit, but are there cases where it is better to exercise and sell?

Does one need to call their broker before the close on Friday?

Can it all be done online?

Would automatic exercise come into play?

Thanks, Kent

 

[heech]

Automatic exercise would come to play, if you ended up ITM.

If the stock is shortable, you can sell short at any point (or price) you'd like and "lock in" your exit... you don't need for expiration. When your call is exercised into a long position, it automatically cancels out the short.

But you should make a little more money from selling the option instead of locking in the profit this way, because of the remaining premium.

 

[dagnyt]

Quote from KAWill70:

I'd like to understand how to exercise an In-The-Money Call at third Friday expiration and immediately sell the stock.

I realize that many traders would simply sell the call at a profit, but are there cases where it is better to exercise and sell?

Does one need to call their broker before the close on Friday?

Can it all be done online?

Would automatic exercise come into play?

Thanks, Kent

1) Yes, it is POSSIBLE that it's better to exercise the option, rather than sell it.

But that situation does not occur often.

2) SELL the option is the best, simplest, quickest, and least costly choice.

But, if the bid for the call is below the intrinsic value of the option, then you may be better off trying to do as you suggest.

3) If the stock is 79.50, for example, and you own the expiring 75 call, you should be able to get $4.50 for that call. If the bid is lower, you can still offer the call at $4.50 and see if anyone bites.

If not, you can cancel and then exercise and sell long stock.

4) When you notify your broker to exercise an option, the action is irrevocable and you should immediately own long stock. Many years ago, there was a rule that forbid this on expiration Friday.

5) You must call your broker and ask what they allow.

Ask if you exercise on expiration Friday, can you immediately sell long stock.

Just be forewarned. This involves extra fees and commissions by your broker and may be a very bad idea. You must also ask the fee to exercise.

6) Can it be done online? Almost certainly yes - if your broker allows you to exercise online.

7) You must find a way to exercsie. Thus, you either call your broker, or submit exercise instructions online. No need to do both.

8) Automatic exercise only comes into play when you hold the option through expiration. that means you do not exercise early and it also means you don't sell the option.

9) If you are not referring to options that are substantially in the money, then you NEVER (under any circumstances) want to exercise early - even if you plan to immediately sell stock.

These options will carry time premium and you don't want to throw that away. If the option is significantly in the money, then it will not have any time premium.

Mark
http://blog.mdwoptions.com

 

[spindr0]

Quote from dagnyt:

3) If the stock is 79.50, for example, and you own the expiring 75 call, you should be able to get $4.50 for that call. If the bid is lower, you can still offer the call at $4.50 and see if anyone bites. If not, you can cancel and then exercise and sell long stock.

I fully agree with Mark's detailed explanation of exercise possibilities. What I would add is that once you have determined that exercise provides a better yield than accepting a below parity bid for the call, don't get fixated on nabbing that extra nickel, dime or more while ignoring the underlying. Yes, you should maximize your sale price but remember that you're still gambling with $4.50 of intrinsic so your primary focus should be on booking that. So while waiting for your option order to get hit, don't ride the underlying down.

 

[KAWill70]

Thanks Heech, Dagnyt, and SpinDr0 for your help. It is much appreciated.

Shorting the stock to lock in the gain is a neat concept. I assume I'd need a margin account to do that which should not be a problem.

Thanks for all the other scenarios and considerations.

Looks like I need to call my brokerage to understand their methods and rules.

I don't have any information on Automatic Exercise, and that could be important if the underlying stock is purchased automatically. One would need to make sure that assets are available to handle that.

The other important point if one would want to exercise and sell immediately is when the brokerage needs to be notified and when the stock would actually be sold. One would not want to do that on the next trading day.

Regard, Kent

 

[dagnyt]

Quote from KAWill70:



I don't have any information on Automatic Exercise,

If the option is ITM when expiration arrives, you will (rare exceptions) be assigned an exercise notice. That means you will learn of the new stock position on Monday morning, before the market opens.

That's all you need to know.

The other important point if one would want to exercise and sell immediately is when the brokerage needs to be notified and when the stock would actually be sold. One would not want to do that on the next trading day.

You cannot exercsie an option without telling the broker. Someone must notify the Options Clearing Corporation of your desire to exercsie, and there is no way for you to do that.

You don't want to exercise and then sell. As SPIN told you, there is risk of holing for any length of time because stock prices change.

Unless it earns extra cash for you - after commissions. That is not going to happen to you too often.

And if you get out of the habit of holding options until they are about to expire, it will never happen.

Regard, Kent

Mark

 

[KAWill70]

Mark - Thanks once again for your help.

The Automatic Exercise now makes a lot of sense and I assume one has three days to settle the purchase. Hopefully the Call buyer was not asleep at the wheel and actually wanted to own the underlying stock.

Regarding doing an Exercise online, I don't believe my platform allows that. The disadvantage there is that commissions are higher when calling an associate.

This post was primarily for my understanding, as I am mainly a covered call writer.

Another post confused me which was the reason for this post.

That post stated that "most traders exercise after the close" which did not make a lot of sense to me. The person who made that statement did not respond to my request for clarification.

Regards, Kent

 

[dagnyt]

Quote from KAWill70:

Mark - Thanks once again for your help.

The Automatic Exercise now makes a lot of sense and I assume one has three days to settle the purchase. Hopefully the Call buyer was not asleep at the wheel and actually wanted to own the underlying stock.

The call owner probably sold it to a market maker, who knows what he/she is doing.

Regarding doing an Exercise online, I don't believe my platform allows that. The disadvantage there is that commissions are higher when calling an associate.

If they FORCE you to call to exercise an option, they should not charge more. Although many brokers charge far too much for an exercise or assignement. It's robbery, IMHO.

Call to learn the fee structure.



Regards, Kent

Mark

 

[KAWill70]

Quote from dagnyt:
The Automatic Exercise now makes a lot of sense and I assume one has three days to settle the purchase. Hopefully the Call buyer was not asleep at the wheel and actually wanted to own the underlying stock.

The call owner probably sold it to a market maker, who knows what he/she is doing.

Thanks Mark.

I think you may have misunderstood my point.

I was just stating than an ITM Call Holder at expiration better not be asleep at the wheel, incapacitated, or unable to contact their broker if they don't want to own the underlying stock and automatic exercise comes into play.

They would suddenly own stock that they really did not want to own.

And secondly, they might not even have enough money to cover the purchase. I suspect that happens from time to time!

Kent