To Exercise an Option or Not Exercise!!

[zac]

Ive a scenario im wondering about.

If I owned 100 XYZ shares I bought for $40 and also purchased a 40 Strike Put Option for 100 shares to hedge my position.

if XYZ shares now dropped to $30,

My Put option has also gained $10 of Intrinsic Value??

So therefore rather than exercising my option to sell shares at $40 cant I sell the Put to get $10 Intrinsic Value + Time Value???
So in effect I get the same result without brokerage + any Time value??

 

[wayneL]

Of course you can.

In fact if the option has time value, you are diddling yourself if you exercise before expiry.

Even if you don't want the shares any more, you are better off selling the options and concurrently selling the shares. This way you capture the remaining time value.

 

[zac]

Of course you can.

In fact if the option has time value, you are diddling yourself if you exercise before expiry.

Even if you don't want the shares any more, you are better off selling the options and concurrently selling the shares. This way you capture the remaining time value.

Thats what I thought,
Cheers Wayne for the response.
It makes sense now, ive some notes that say you should NEVER EVER EVER EVER exercise an option and always sell it atleast a few weeks before expiry.

 

[jubuss]

Hey guys on a similar topic, when are options "Usually" exercised based on price??

Are they generally exercised once the strike has been passed by $0.01cent or do you think it would be more likely that it could be strike plus option premium paid?? I know it's very hard to guess as investors are purchasing options at various times and therefor for various premiums, but as a general rule could you say that options are exercised after strike PLUS premium have been surpassed??

Or would most people just exercise the options after strike has been passed and hope the stock increases above premium paid??

Thanks

 

[StockTrader010]

Ive a scenario im wondering about.

If I owned 100 XYZ shares I bought for $40 and also purchased a 40 Strike Put Option for 100 shares to hedge my position.

if XYZ shares now dropped to $30,

My Put option has also gained $10 of Intrinsic Value??

So therefore rather than exercising my option to sell shares at $40 cant I sell the Put to get $10 Intrinsic Value + Time Value???
So in effect I get the same result without brokerage + any Time value??

For a put option it is not interesting to exercise. Unless the company goes bankrupt of course.