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What can you do with an option?


This article covers some basic stuff related to options owners. What are your choices when you own an option? You have three choices: sell it, exercise it or allow it to expire worthless. And that’s true whether you own a call or a put. Each choice has its pros and cons. Each choice might lead to different profit outcome.

 

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

  • Notify your broker that you want to do what the contract allows.  
  • 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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