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If someone can help me by answering question about options

  • #1
  • First Post: Edited 9:33pm Feb 5, 2016 9:18pm | Edited 9:33pm
Hello, thanks for reading, I have a few question and my google search has only lead to confusion.

1. If you let a stock option that is in the money exercise, do you need to have extra money sitting in your account during expiration day to be able to purchase the stock?

2. If using td ameritrade platform and you buy "+50" quanity in options, is that 50 contracts (aka shares) OR 50x100 = 5000 shares?

3. If you exercise an option, what happens to the money that you used to purchase the option?

4. How do I know the exact amount needed for a smooth option "exercise" on expiration?

5. I know you can close out an option before expiration to lock profits if your are in the money, but can you cut your losses before expiration so you don't lose all premium paid?

Thanks.
I love forex. One day it will love me back.
  • #2
  • Feb 6, 2016 2:03pm Feb 6, 2016 2:03pm
Quoting Singha83
Hello, thanks for reading, I have a few question and my google search has only lead to confusion. 1. If you let a stock option that is in the money exercise, do you need to have extra money sitting in your account during expiration day to be able to purchase the stock? 2. If using td ameritrade platform and you buy "+50" quanity in options, is that 50 contracts (aka shares) OR 50x100 = 5000 shares? 3. If you exercise an option, what happens to the money that you used to purchase the option? 4. How do I know the exact amount needed for a smooth option...
1. If you let a stock option that is in the money exercise, do you need to have extra money sitting in your account during expiration day to be able to purchase the stock?

>>Options are usually exercised automatically by your broker @ expiration if ITM. Stock brokers usually have 2:1 leverage for stock purchases so you would need 50% of the money needed to purchase the stock. If you sold a put that ended ITM you better close before expiration or have enough $ in your account (50%) to purchase the stock.

2. If using td ameritrade platform and you buy "+50" quanity in options, is that 50 contracts (aka shares) OR 50x100 = 5000 shares?

>>One option is the equivalent to 100 shares of the stock.

3. If you exercise an option, what happens to the money that you used to purchase the option?

>>If you purchase an ITM option for $100 that has an intrinsic value of $75 and you immediately exercise the option, you'll have an immediate loss of $25+ commissions. Best to not exercise an option unless the spread in the option is too big to get out @ a decent price. If the spread is small, better to close the option & purchase the stock rather than exercise the option.

4. How do I know the exact amount needed for a smooth option "exercise" on expiration?

>>Take the (number of options x 100 x stock price)/2=$$ needed to purchase the stock (If broker allows 2:1 leverage)(commissions not included in calculation). Your option position has some value depending upon strike price but that value is already reflected in your account valuation.

5. I know you can close out an option before expiration to lock profits if your are in the money, but can you cut your losses before expiration so you don't lose all premium paid?

>>Yes, options can be closed @ any time unless they're european options. All US stocks have american options.

***Just curious, why all the questions about exercising options? I've been trading options for more than 20 years but rarely let options be exercised. Occasionally I'll sell naked puts & let them get exercised automatically rather than pay the spread to get out. If buying calls, better to sell the option prior to expiration rather than use the margin in your account.

***ALL information above is based upon american options on stocks. Information does not apply to european or binary options.
  • #3
  • Feb 7, 2016 12:33pm Feb 7, 2016 12:33pm
Thanks for your detailed answers, they have helped a good deal. I made a my first ever option trade (a "call") and I am in the money and I see this stock going further than I would expect and was confused why people would close out "winning" position since I have been always taught the mentality of "cutting the losses and letting the winners run."

I assumed these answers could had been easily found on google but many sites so far have been very brief in their explanations. Maybe I was reading the wrong sites!

Is there a webisite like how "babypips" is for forex but in regards to option trading?

Thanks again for answering.
I love forex. One day it will love me back.
  • #4
  • Last Post: Feb 7, 2016 1:02pm Feb 7, 2016 1:02pm
Quoting Singha83
Thanks for your detailed answers, they have helped a good deal. I made a my first ever option trade (a "call") and I am in the money and I see this stock going further than I would expect and was confused why people would close out "winning" position since I have been always taught the mentality of "cutting the losses and letting the winners run." I assumed these answers could had been easily found on google but many sites so far have been very brief in their explanations. Maybe I was reading the wrong sites! Is there a webisite like how "babypips"...
If your position is getting close to expiration but you still like the holding you can "roll" the position to a farther-out month. So if your position expires the 3rd week of february, you can sell the february call & buy a march, april, etc.... call to stay in the bullish position. Also, as price rises I like to roll "up" as well as roll "out". This will lock in some profits as price rises. So if you bought the $12 call on a $14 stock and now the price of the stock is $18, you might want to sell the $12 call and buy a $15 call. Always pay attention to the premium though in the option you're buying. Time decay can be a killer if paying too much premium which is why I usually buy call spreads rather than strait calls. Your profit will be limited but you can roll to a higher strike spread as price rises to continue to participate in the rise.

I don't have any specific site to review but just did a quick search & here's one that looks OK.
http://www.nasdaq.com/investing/options-guide/
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