exercising an option

[JackRab]

That would only apply to puts in non futures options. Why would calls in futures options be different?

I think @sle means when you have use borrowed money finance margin to buy the puts or calls... in which case the interest you're paying is likely higher than the interest component in the option.

Although... with long naked calls... if you exercise you get the future, and still have the same margin amount wouldn't you? Probably more? Depends as well on whether you're fully delta-hedged (+ call - future)... in that case, your margin should be very low anyway...

The interest components in futures options are very low anyway right? Because it's all marked-to-market, daily settlements of maintenance margins?

 

[JackRab]

... so your early-ex decision is purely driven by the interest on the premium.

But don't futures options have daily maintenance margin settlements? So you don't actually pay the full premium at purchase?

 

[ironchef]

If you have substantial gains on your options, by exercising and hold the underlying, you can defer your gain until the underlying is sold. That could be a significant advantage in exercising instead of selling.

 

[JackRab]

If you have substantial gains on your options, by exercising and hold the underlying, you can defer your gain until the underlying is sold. That could be a significant advantage in exercising instead of selling.

That doesn't have anything to do with early exercising though. Because by not exercising you still hold the options... So you're talking about exercise at expiry...

 

[ironchef]

That doesn't have anything to do with early exercising though. Because by not exercising you still hold the options... So you're talking about exercise at expiry...

True.

 

[sle]

But don't futures options have daily maintenance margin settlements? So you don't actually pay the full premium at purchase?

It's even trickier because your SPAN margin treatment differs if you are delta-hedged or holding it outright (e.g. if you have a DITM option, you will get different margin treatment if you hold a futures against it or not, worse if you are holding a different option against it etc). Now with rates where they are it's not really a consideration anyway, but there was a point in time when it mattered

 

[ironchef]

That doesn't have anything to do with early exercising though. Because by not exercising you still hold the options... So you're talking about exercise at expiry...

If I want to defer paying capital gain, exercising is the only way I know so I may want to exercise early to lock in my gain. Rolling out has the same tax treatment as selling the shorter duration. And if you roll out a loss, the wash sell rules applied so you cannot roll out a loser to cover rolling out a winner.

Are there other way that I can defer my capital gains on options? Thanks.

 

[donnap]

Actually, in case of futures options, you should early-ex any option where your margin carry exceeds optionality. It applied to both puts and calls, i.e. if you have something that is deep enough ITM that cumulative margin interest is bigger then time value. It's been a while since we had anything like that in real life, obviously, with rates at zero.

True. Given the wording of OP's question, I felt that my generic answer was sufficient. His level of knowledge seemed to justify it.

I should always add "generally" or "there are exceptions" to option rules of thumb because, generally, there are often exceptions. And because of guys like you.

And while your statement is still applicable, generally, retail traders have tough time earning i on capital - even back when rates were higher. I'd imagine that MM's and other pros have much more efficient means of earning i on capital.

I would trade into conversions back when rates were 3-5%+ because I made more i from that than the broker paid. I then had some additional interest expense on margin, but overall it worked out well. Not exactly a sweep, though.