stan255 0 Report post Posted April 13, 2017 What happens to your premium if your option was exercised? E.g: You sold a put contract for $0.5 and let's say the stock hit your strike price and your option got exercised. What happens to the $0.5 premium? Share this post Link to post Share on other sites
Yowster 7,995 Report post Posted April 13, 2017 1 minute ago, stan255 said: What happens to your premium if your option was exercised? E.g: You sold a put contract for $0.5 and let's say the stock hit your strike price and your option got exercised. What happens to the $0.5 premium? @stan255- when you sell an option, you collect the premium up front, so you get to keep all of it. For example, if you sell a 20 strike put for stock XYZ for 0.50 and you get exercised then you are really buying the stock for 19.50. Practically speaking, you are highly unlikely to get exercised unless your strike is so far in the money that the remaining time premium left in the option is near zero. 1 stan255 reacted to this Share this post Link to post Share on other sites
stan255 0 Report post Posted April 13, 2017 3 hours ago, Yowster said: @stan255- when you sell an option, you collect the premium up front, so you get to keep all of it. For example, if you sell a 20 strike put for stock XYZ for 0.50 and you get exercised then you are really buying the stock for 19.50. Practically speaking, you are highly unlikely to get exercised unless your strike is so far in the money that the remaining time premium left in the option is near zero. Don't you have to buy back the contract to collect the premium? Share this post Link to post Share on other sites
greenspan76 300 Report post Posted April 13, 2017 6 hours ago, stan255 said: Don't you have to buy back the contract to collect the premium? No, you already collected the premium when you sold the put option. You sold someone the right to sell the stock to you at the strike price. In return, you collected a premium (cash). If the buyer exercises that right, then you're required to deliver cash to him in exchange for the stock. At that point, the contract is fulfilled and no longer exists. So there is no contract for you to buy back. Share this post Link to post Share on other sites
Guest mark Report post Posted April 19, 2017 What happens when you sell a covered call Share this post Link to post Share on other sites
Yowster 7,995 Report post Posted April 19, 2017 (edited) 47 minutes ago, Guest mark said: What happens when you sell a covered call An example is the best illustration for this. Say you have 100 shares of a $50 stock and you sell a 55 strike call for $1.00. thereby collecting $100. There is no margin requirement as the option is covered by your stock: If the stock price is below $55 at expiration you simply get to keep the $100. If the stock price dropped below $50 then the $100 would offset some of the unrealized stock loss. If the stock rises but is less than $55 at expiration the $100 will enhance your unrealized stock gain. If the stock is $55 or above at expiration and you let the option get exercised (if you don't buy back the short call), the 100 shares of stock get sold at $55 which in essence means you sell the stock for $56 because you collected $100 by selling the call. If you don't want the option to be exercised and your stock shares sold, you can buy back the short call to close that position - in this case you'll likely buy it for more than the $100 you collected, but the stock will have appreciated much more than that so you would still be money ahead. Edited April 19, 2017 by Yowster Share this post Link to post Share on other sites
