What can you do with an option?

If you own an option, you
have three choices. And that’s true
whether you own a call or a put.

1) You can sell it.

  •  If you collect
    more than you paid, you have a profit.
  • If you collect
    less than you paid, you have a loss.
  • You bought this
    option by entering a buy order with
    your broker. This time you enter a sell order to close (eliminate) your
    position.


2) You can exercise it by notifying your broker that you want to do what the contract allows.  Thus:

  • If you own a call
    option, you may buy 100 shares of the underlying stock. You pay the strike price per share.
     
  • If you own a put
    option, you may sell 100 shares of the underlying stock. You collect the strike price per share.


3) You can
allow it to expire worthless
.

  • This is not your
    ideal solution because it means you lost every penny that you paid to buy the
    option.
  • When you hold an
    option, hoping for a favorable movement in the price of the underlying stock,
    many times that move never occurs and your option is out of the money.
  • When an option is
    out of the money when expiration arrives, it has no value and is
    worthless. Because it expires, your
    right to buy the underlying stock expires.
  • You may try to
    sell your option before it expires, but if there is little time before
    expiration, or if the option is out of the money by a significant amount, you
    may discover that no one is willing to buy the option. If that happens, you still own the option and
    will have to allow it to expire and become worthless.

New Optionspeak terms:

Out of the money:

    a) A call option
whose strike price is higher than the stock price

    b) A put option
whose strike price is lower than the stock price

In
the money:


    a) A call option
whose strike price is lower than the stock price

    b) A put option
whose strike price is above the stock price

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