options
- Thread starter kcnewtrader
- Start date
I understand everything you were trying to say now MTE now that i know there is a difference in exercising it and just reselling it. All im trying to figure out now is if i sell the option that i bought is if its the same as being in a option writers position because I dont want to owe the next guy any money if the price changes. That and I want to know if im going to lose anything if I accidently let the option go to long and the broker exercises it on me or if they will just sell the shares and i get the profit i made. And im sorry to be such an inconvienance for everyone.
I see so I can loose more then the amount I paid for the option. If they exercise it on me because of my failure to close the position and the stock drops badly then.
If you sell the option you already own then that's it, you are out and you don't owe anything to anyone anymore.
The term "write" refers to when you are short an option. In this case you have the obligation to the buyer. To close out this position you would buy the same option.
If you keep the option till expiry and it is exercised then you will buy the shares at the strike if it is a call (i.e. you will have a long position in the stock), or you will sell the shares at the strike if it is a put (i.e. you will have a short position in the stock).
The broker will NOT sell the shares automatically for you. If you don't want the shares then you need to actually place an order to sell them. With that said, the broker may sell the shares if you don't have enough money in the account to cover the share purchase and you do not respond to their margin call. For example, if you don't deposit the extra cash or sell the shares yourself within a day or two they will automatically sell the shares for you. However, any expenses and losses incured are still on you!
The biggest risk of letting an option get exercised/assigned (assuming you don't actually want the shares) is weekend gap risk. That is, when a call option is exercised you buy the shares at the strike price. If the stock opens much lower on Monday then you can end up with a loss even though the option was in-the-money on Friday. Why? Because you would be selling the shares at a lower price than what it was on Friday's close.
)Alright well now I understand why I was lost to begin with lol . All the stuff ive read before talked about exercising them or writing them and not about being able to trade them. So thats why i was always confused about the premium price because when you excersize the option your using it up loosing what you spent on it in order to buy the stock at the right price. So thats what happened I think.
Well I think I finally understand how to use them. Thanks for all of your help everyone.
Now all I have to do is find out the best brokerage places to go through for options and im all set.
If you own an option you can exercise it at any time, even if it's OTM. Of course, there's no rational reason to do so. (You wouldn't want to buy an asset above its market price, or sell it below its market price.) But you can indeed sell an option without exercising it, and plenty of option traders buy and sell options without ever exercising them.
It does indeed matter at what strike price you buy an option, especially given the graininess of option pricing (typically in 0.05 increments) and the large bid/ask spreads. In practice a 0.10 far OTM call won't go to 0.15 until there's been a substantial movement up in the underlying asset, while a deep ITM call will closely track the price movement of the underlying. But "in theory" all calls will rise in value when the underlying goes up, and all puts will lower in value. Whether or not they are ITM.