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denvert · Jun 28, 2009

Hello all,

I am really new to options so mind me if I bore you. Is it a good idea to buy deep in the money calls, exercise them at expiry and sell the stocks in the open market? Also what trading platform do you guys suggest? Thank you.

wartrace · Jun 28, 2009

Gee, why didn't we think of that

I suggest you hit the books, you do not know enough about options to even be thinking about trading them. What were your paper trading results from this stratedgy?

Try it out with fake money first here;
http://www.cboe.com/tradtool/papermoney.aspx

You have to sign up for a free account. Paper trade your idea for six months and see how it does. I would hate to see you throw (real) money away.

erol · Jun 28, 2009

the rabbit hole grows deep the more you read up on it.

You'll find that options aren't really used in the way they were "designed".

Most positions are closed before expiration, options are rarely exercised, since they're priced in such a way that it doesn't make financial sense to exercise. And since they're leveraged, the amount of capital required to purchase shares w/out margin can be very high.

You'll find out that options (ITM/OTM Calls & Puts) are combined to create risk profiles based on what the market is doing, or what traders think the market will do.

Extremely powerful tools if you know how to use them.....

I myself don't (yet), I'm still learning myself.

dagnyt · Jun 28, 2009

Quote from denvert:

Hello all,

I am really new to options so mind me if I bore you. Is it a good idea to buy deep in the money calls, exercise them at expiry and sell the stocks in the open market? Also what trading platform do you guys suggest? Thank you.

It's a very bad idea.

Commissions will kill you.

It is almost NEVER right for an individual investor to exercise an option. When you no longer want to own it, just sell it.

Mark

denvert · Jun 28, 2009

Thank you all for your replies. I had a feeling its not that easy. Also I'm not trading options right now, instead paper money, but was just curious hence still new. Again thanks for the replies.

RobtF · Jun 29, 2009

Quote from dagnyt:

It is almost NEVER right for an individual investor to exercise an option. When you no longer want to own it, just sell it.

Mark

Would it make sense to exercise in order to capture a dividend or do you feel that's priced in?

MTE · Jun 29, 2009

Quote from RobtF:

Would it make sense to exercise in order to capture a dividend or do you feel that's priced in?

You don't have to feel anything, there's an easy way to calculate whether it's worth exercising for the dividend or not. If you buy a call then for your own benefit you should keep track of the dividends and whether it is worth exercising or not.

dagnyt · Jun 29, 2009

Quote from RobtF:

Would it make sense to exercise in order to capture a dividend or do you feel that's priced in?

There are two good times to exercise an option, but too many traders exercise then immediately sell stock. There is no reason to do that.

1) Yes, it is occasionally correct to exercise for the dividend. But not every dividend. There are calculations (easy ones) to be made.

If the option delta is not 100 and if there is time premium in the options bid, then it is probably wrong to exercise.

NOTE: You may collect the dividend, but then you are naked long the shares prior to expiration, and a stock decline could be costly. When you exercise for the dividend, you are selling the equivalent put option for the price of the dividend (and don't forget to subtract the cost of carrying the stock thru expiration).

2) If the options bid is below parity. That means if it's below the option's intrinsic value, then it is better to exercsie and sell stock.

But for most investors, these don't apply - or at least not very often.

Good trading
Mark