Question about exercising options

L

Leigham

Hey guys,

This may sound like a silly question, but I'm with td waterhouse and I have a bit of confusion as HOW exactly I exercise my option.

If I "sell to close" I am selling to profit off of the appreciation of the underlying asset (the option contract it's self)

If I buy to close I am simply closing my position.

Do I have to call my broker in order to actually exercise the option? Or am I simply missing a command in the drop down menu? Just to be clear I understand options relatively well. I just usually sell them for the profit and never actually exercise but now I want to exercise and I'm un sure about how to go and do that. They aren't european options (they are Canadian so I can exercise them when I please)
 
I'm not sure there are canadian options opposed to european options, if you mean they are options listed in Canada I can't help you about the way to exercise them through TD waterhouse but i'm curious about how to exercise non US options with IB, as after a quick look today, I found information on how to exercise only US options.
 
You need to talk with your broker. If option is ITM by a certain amount (usually 0.01) by expiry, most brokers will auto exercise. Else, look around for a menu item that says 'Exercise'. You are right in that 'Buy/Sell to Close' will not exercise the option.

Although, any reason why you want to exercise as opposed to just closing your position?
 
The reason why I'd like to exercise is because I've bought some call options on some oil stocks with a 6 month expiration date, I won't be exercising them this minute but none the less I would like to exercise my right If they happen to be in the money in the upcoming 6 months. Now exactly why I want to do it? Because I've calculated it will be more profitable to sell the shares on the market than if I were to profit off off the appreciation of the option.
 
Leigham said:
The reason why I'd like to exercise is because I've bought some call options on some oil stocks with a 6 month expiration date, I won't be exercising them this minute but none the less I would like to exercise my right If they happen to be in the money in the upcoming 6 months. Now exactly why I want to do it? Because I've calculated it will be more profitable to sell the shares on the market than if I were to profit off off the appreciation of the option.
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Ok I understand. I asked the question because most brokers except IB charge heavy fees for exercise/assignment. Just factor that into your profits.
 
Okay thanks for the info I will definitely keep that in mind.

So let's say I have two choices

1. Exercise Half of my options. And then use the profit from the shares after I sold them on the market to exercise the other half of my options?

2 . Or should I borrow some money from my margin account and exercise the options all I once.

The reason for this thinking is because the amount of money I will have at this date will amount to half of the money necessary to exercise the options.

Ultimately I'm asking what would be the cheapest in terms of brokerage fees ?
 
It depends on what your brokerage charges for:
1.exercise
2.stock trade commission
3.option trade commission
4.margin interest

Also a point to note is: It is only profitable to exercise as opposed to closing an option when:
The option is so deep in the money that there is almost 0 time value left. And the upcoming dividends exceed whatever time value is left.

Early exercise is a pretty advanced strategy although it may look basic. Saving on brokerage fees is not a good reason to early exercise.

But that is just my opinion.
 
victor, According to their website IB charges a stocktrade commission on exercise of Non US options. Add in transaction tax from some exhanges and nobody will buy back ditm calls at par.
 
Thanks, yes you are right. I was thinking of us options.
Can you elaborate why nobody wants ditm calls at par? is it true under all circumstances?
 
Definetely not true in all circumstances and if a non mm wants those calls I guess you can get better than par, but european option markets are not very crowded ime hence - from limited experience- I ended up several times with ditm calls sold slightly below par or at best when the underlying bid reached my selling price (happened last monday or friday with BMW March 20 calls ).
Earlier this week I tried to sell 14 calls expiring thursday evening at .94, stock price reached 14.95 and bid at least 14.94 but couldn't sell a single call.From there the price went south, ugly.
If you add the transaction tax of 0.1% in that case and the commission from IB, exercising the calls will cost about 0.0194 per share. i'm not sure how a mm calculates his cost, but he must be buying slightly below par.
Another problem, like in the case above is the large number of calls i tried to sell, mm couldn't hedge himself with the underlying - still I had hoped to sell a few calls.
Also when prices were moving very fast, I've sold calls several cents below par. The sweeter thing in that case is the ditm calls were already largely profitable and didn't feel too sad.
 
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