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If the options are exercised, there is no options profit. It simply reduces the basis in the stock you own once you exercise the options.
both sentences are incorrect.
1. Many options are settled in cash. At expiration (OP case), if these options are in the money, gains or loss (if the payoff is less than the option cost) are realized. No increase or decrease in the basis.
2. For call options requiring physical delivery, exercising increases (not decreases) the # of shares.
1. Many options are settled in cash. At expiration (OP case), if these options are in the money, gains or loss (if the payoff is less than the option cost) are realized. No increase or decrease in the basis.
If the option is exercised then it's not settled in cash is it? It's settled in stock. The person exercising the option now has stock that they paid $2 less than the market price and assuming no change in the market price, the stock has a lower basis for the option exerciser.
(1)-That is, the person exercising the option has 1,000 shares that cost them $25,000 + $500 for the option that gives them the right to buy that stock for $25,000.
(2)-Another person getting a fill at the exact same moment pays the market price of $27,000.
Doesn't the option exerciser have a lower basis?
Quote:
Originally Posted by acegolfer
2. For call options requiring physical delivery, exercising increases (not decreases) the # of shares.
I don't know what you are saying here at all.
Who experiences an increase in the # of shares? The person who originally sold the option has to deliver the shares to the person who is exercising the option, but where they get them doesn't affect the number of shares on the market. If the option seller doesn't own the shares, they have to go out and buy them and eat the price difference. If they already owned the stock ( wrote a covered call ) then they just have to sell their stock for less than market.
Would this be a good time to point out that the hypothetical situation involves the underlying stock experiencing a remarkably unlikely 35% rise in value over 6 weeks' time?
Yes, it can and does happen. But not that often. The profit lies in taking the short odds most of the time.
Your eyes get big at the possible large gains. But you overlook the far more likely "dribble, dribble, dribble" of the option's value withering as the expiration date draws nearer.
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As for the details of exercising the open-market options - why bother? Instead, you sell the option to someone wanting to zero out their position.
99+% of these are settled in cash. Nobody messes around with actually taking delivery of the underlying.
Would this be a good time to point out that the hypothetical situation involves the underlying stock experiencing a remarkably unlikely 35% rise in value over 6 weeks' time?
Yes, it can and does happen. But not that often.
Sure, but the OP decided that was what they wanted.
The point in doing examples like this is not to use believable real-world examples, but numbers that are easy to understand and visualize. Having the stock go from $26.74 to $27.13 would just be nutty.
However, that being said, it's always a good time to point out that living up to the example is unlikely.
Quote:
Originally Posted by Big G
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As for the details of exercising the open-market options - why bother? Instead, you sell the option to someone wanting to zero out their position.
99+% of these are settled in cash. Nobody messes around with actually taking delivery of the underlying.
Again, in order to understand how options work, it's always useful to take the example to exercise.
Examples using straddles, collars, strangles, selling one side of the trade part of the way into it ... sure these are all real world examples, but from my limited sample, I would bet that 99% of stock traders don't have a clue about how options work and don't even know that there is such a thing as exchange-traded options.
I might do 10-20 simple options trades a year.
I have only exercised the option once and that was when the broker told me after the market closed that the price I sold at was not a real price and there was no sale. I had a 4-bagger and this pissed me off. I owned 5,000 shares of GDX back when it was a $40 stock in an account that had only $50k in assets in it.
It worked out OK, because the first Monday after expiry, the stock popped another 70 cents and I made another $3,500 when I sold it, but the overall proceeds were less than I thought I had the previous Friday.
Instead of buying calls, I personally write covered calls as I have a large positions in several tech companies, acquired as founders stock, employee stock purchase programs, exercised & held ISOs and non-qualified stock options over the years ... where my basis is essentially zero or almost zero. It generates a nice low 6 figure or high 5 figure cash flow each year.
Instead of buying calls, I personally write covered calls as I have a large positions in several tech companies, acquired as founders stock, employee stock purchase programs, exercised & held ISOs and non-qualified stock options over the years ... where my basis is essentially zero or almost zero. It generates a nice low 6 figure or high 5 figure cash flow each year.
Your personal strategy literally has zero to do with the thread lol. I'm not sure the point other than not so subtle brag
Your personal strategy literally has zero to do with the thread lol. I'm not sure the point other than not so subtle brag
I have talked to a lot of people who like doing the covered call thing. I'm going to allow this to be included in this thread.
Quote:
Originally Posted by SportyandMisty
Instead of buying calls, I personally write covered calls ... where my basis is essentially zero or almost zero. It generates a nice low 6 figure or high 5 figure cash flow each year.
If you are writing such a volume of calls, don't you get your shares called a bunch of the time?
If you sell, say $10k worth of calls in ZZZ, but half of those calls result in you having to give up stock, you aren't counting that, say $5k of sales as income, right? It's cash flow, but it results in capital gains tax of about 100% of the value of the stock that you have to sell as a result of the call being exercised, right.
It seems to me that for someone with a really low basis, you are selling stock that you didn't want to sell and paying tax on about 100% of the sale process plus paying tax on the proceeds of the options sales.
Is the sale of the called stock part of your cash flow? That seems like a pretty good strategy where you make some money from un-called stock and liquidate a measured portion of your stock portfolio.
I have talked to a lot of people who like doing the covered call thing. I'm going to allow this to be included in this thread.If you are writing such a volume of calls, don't you get your shares called a bunch of the time?
If you sell, say $10k worth of calls in ZZZ, but half of those calls result in you having to give up stock, you aren't counting that, say $5k of sales as income, right? It's cash flow, but it results in capital gains tax of about 100% of the value of the stock that you have to sell as a result of the call being exercised, right.
It seems to me that for someone with a really low basis, you are selling stock that you didn't want to sell and paying tax on about 100% of the sale process plus paying tax on the proceeds of the options sales.
Is the sale of the called stock part of your cash flow? That seems like a pretty good strategy where you make some money from un-called stock and liquidate a measured portion of your stock portfolio.
Am I missing something? I probably am.
When I'm in danger of being called, I roll the options forward by buying them back and selling new ones with a longer duration. Once I've had to short against the box.
When I'm in danger of being called, I roll the options forward by buying them back and selling new ones with a longer duration. Once I've had to short against the box.
A normal assignment would go against cash or margin wherever the stock was long and not the short side. Sounds a bit abnormal for an assignment to hit the short side, especially given the short approval is a requirement before going short, typically
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