Quiz Answers

If you missed the quiz, take a peek before looking at the answers below.

1) The large decline in the price of the underlying stock occurred after the options expired.

2)  You did something very foolish.  You exercised options that still have a good deal of time premium remaining – perhaps several hundred dollars per option).

You never want to exercise options prior to expiration.  in fact, if you simply planned to sell options when you no monger want to own them, that would be best.  There is apparently some misunderstanding about when to exercise options that is being spread.  Don't fall into this trap.

Yes, you could have earned a nice profit – by selling the options.

3)  Something else.  Some of you may consider this to be an unfair question, but I want to be certain you understand option strategies. 

When you were assigned an exercise notice, you sold your stock.  Because you no longer own stock, you cannot write covered calls, unless you buy more stock

Thus, the answer is that it depends on buying stock first.

Note:  You may sell cash-secured puts instead of writing covered calls.  The two strategies are equivalent.  Please remember that these are bullish strategies.

4)  There is no such process.  The seller of an option has no rights and must wait until the call owner decides to exercise.  Nearly 100% of the time, that exercise does not occur prior to expiration.

5)  No.  The OCC (Options Clearing Corporation) guarantees that all option contracts are honored.

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2 Responses to Quiz Answers

  1. Globetrotter 12/10/2008 at 1:00 AM #

    If you have some near month vertical spreads that are in the money and they just barely go out of the money, is it better to roll them to the next month (for a credit) and then have not only more time but the possibility to roll them back (again for a credit, I assume) if they stay out of the money at options expiration?

  2. Mark Wolfinger 12/10/2008 at 9:58 AM #

    Reply is a separate blog post.