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
7
Comments are closed.