I've exercised long options early in a couple cases.
- when an option has such a low bid price (and is thinly enough traded) that I would have to sell the option for less than its intrinsic value. One time I had some options that were, I think, DJ 55 puts. When DJ got down to 50, I wanted to sell them. I couldn't get $5.10, or even $5. I think the bid was $4.80. Finally, when DJ got down to 49.85, my order to sell at $5 was filled. The person on the other side got $.15 for free. But I didn't have to give that $.15 up: If I had had enough margin, I would have cancelled my order to sell the options and would have bought an equivalent amount of DJ stock at any point below $50, then exercised the option, and overnight my stock would be sold at $50 and my option would have effectively been sold for $5 or more.
- when you want to trade an option based on its expected value (because of the price of the underlying stock) but can't because it's after hours. Suppose you had some RIMM 75 puts last week. Minutes after its earnings report, RIMM dropped to 68.50. If you were afraid RIMM would recover somewhat by the time the market opened the next morning, and wanted to lock in your gains, you could have bought RIMM after hours at 68.50 and then exercised your 75 puts the next day, ensuring your options would be worth $6.50. (If RIMM recovers a lot by the next morning, you would probably make more money by instead selling the stock you bought the previous night, and the puts, after the market opens).
RIMM did recover and opened at $70 the next morning. The 75 puts opened at just $5.40, although they did go higher later in the day.
- when an option has such a low bid price (and is thinly enough traded) that I would have to sell the option for less than its intrinsic value. One time I had some options that were, I think, DJ 55 puts. When DJ got down to 50, I wanted to sell them. I couldn't get $5.10, or even $5. I think the bid was $4.80. Finally, when DJ got down to 49.85, my order to sell at $5 was filled. The person on the other side got $.15 for free. But I didn't have to give that $.15 up: If I had had enough margin, I would have cancelled my order to sell the options and would have bought an equivalent amount of DJ stock at any point below $50, then exercised the option, and overnight my stock would be sold at $50 and my option would have effectively been sold for $5 or more.
- when you want to trade an option based on its expected value (because of the price of the underlying stock) but can't because it's after hours. Suppose you had some RIMM 75 puts last week. Minutes after its earnings report, RIMM dropped to 68.50. If you were afraid RIMM would recover somewhat by the time the market opened the next morning, and wanted to lock in your gains, you could have bought RIMM after hours at 68.50 and then exercised your 75 puts the next day, ensuring your options would be worth $6.50. (If RIMM recovers a lot by the next morning, you would probably make more money by instead selling the stock you bought the previous night, and the puts, after the market opens).
RIMM did recover and opened at $70 the next morning. The 75 puts opened at just $5.40, although they did go higher later in the day.
:eek:
:eek: