- What are Call Options?
- What are Naked Puts?
- How to Turn $4,000 into $20,000 with Options Trading
- Best Option Brokers
Definition of Exercising Options:
Calls and puts give the owner the right to buy or sell a stock at a certain price by a certain date. When the holder of that call or put option has an option that is "in-the-money" and decides to buy or sell the stock, it is said that he is "exercising" his option. However, just because an option is "in-the-money" it doesn't mean that it is always in the best interest of the option holder to hold it. Most of the time the option holder is better off by just selling the option back at the current market price. This is because the option price is usually higher than the "intrinsic value", or the amount the option is actually "in-the-money." At expiration date, as the markets are about to close, it usually makes sense to exercise them.
When to Exercise a Call Option
If you own a call option and the stock price is HIGHER than the strike price, then it makes sense for you to exercise your call. This way you can buy the stock at a lower price and immediately sell it to the market at the higher price.
When to Exercise a Put Option
If you own a put option and the stock price is LOWER than the strike price, then it makes sense for you to exercise your put This way you can sell the stock at a higher price and immediately buy it back at the lower price.
Example of Exercising Your Options: If you bought a 100 shares of Apple Computer (AAPL) at $335 and you are afraid the price might drop below $300, you can buy an AAPL Put Option with a strike price of $300. That way if the price drops to $275 you will be able to exercise your option and sell your stock for $300. Please note that you don't "HAVE TO" sell your AAPL shares at $300! If the price in the market is $350 then of course you can sell your shares in the market at $350. That is why it is called an option--it is an option and not an obligation.
Here are the top 10 option concepts you should understand before making your first real trade: