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Stock XYZ trades at $5.50 per share in February. You buy one $6.00 call option that expires March 16th at a premium of .15 cents. The stock price gradually rises to $6.30 during the course of the month. On March 12th, days before expiration, your call option now trades at a premium of .30 cents. You have a paper gain of 100%.
The stock price continues to rise that day to $6.40. You are now .40 cents ITM. You attempt to sell (to close) your position, but due to bid/ask differentials, you can only sell for .30 cents. You will still make a 100% ROI, but it will cost you an additional .10 cents worth of profits in order to facilitate the sale. To redeem the option's full intrinsic value of at least .40 cents, would you be better off holding until expiration? Assuming of course that the stock price does not decline?
Will the option retain its full intrinsic value of .40 cents upon expiration? What is the consequence of holding the option until expiration? My brokerage says that they automatically execute a sell to close order at or just prior to expiration. If so, do I receive the full intrinsic value?
I also noticed that in the final days before expiration options can trade below their intrinsic value due to premium decay, lack of liquidity, etc. Are holders of these options better off selling ahead of expiration at the market rate? Or holding until expiration?
I don’t know of any firm that closes out option positions automatically. You can be exercised if you are itm I think a nickle or more but that would happen only after the close say on Friday of expiration. If the bid/ask is terrible you could exercise your options and sell the stock depending on transaction costs that might work out better
I don’t know of any firm that closes out option positions automatically. You can be exercised if you are itm I think a nickle or more but that would happen only after the close say on Friday of expiration. If the bid/ask is terrible you could exercise your options and sell the stock depending on transaction costs that might work out better
If an account can not support the exercise or assignment, yes firms can close automatically. And you can be exercised if you even a penny ($.01) ITM, at expiration OR *AT ANY TIME with an EQ.
For the OP, you would not go at the bid/ask, you would set at a minimum the mid-point, or your limit order at least at your max profit, hoping to have a MM take pity on you. Also by setting the limit order, you're setting a hard price for ALL the market to see, which COULD affect the MM's decision to navigate towards you*. (*Depending if there is enough volume (you not the strike)).
If an account can not support the exercise or assignment, yes firms can close automatically. And you can be exercised if you even a penny ($.01) ITM, at expiration OR *AT ANY TIME with an EQ.
For the OP, you would not go at the bid/ask, you would set at a minimum the mid-point, or your limit order at least at your max profit, hoping to have a MM take pity on you. Also by setting the limit order, you're setting a hard price for ALL the market to see, which COULD affect the MM's decision to navigate towards you*. (*Depending if there is enough volume (you not the strike)).
Can and automatic are completely different and we weren’t taking about assignments either. Also what long options are getting forced exercised at any time being a penny itm prior to expiration?
Can and automatic are completely different and we weren’t taking about assignments either. Also what long options are getting forced exercised at any time being a penny itm prior to expiration?
If an account CAN NOT support an auto exercise by being ITM at expiration, the holding firm CAN and WILL, AUTOMATICALLY close that position.
And my statement should have read *ASSIGNED AT ANY TIME with a SHORT in EQ's...since the only one that can exercise an option is the call/put holder.
My brokerage says they automatically close out the position. Hopefully that means a sell to close order, not exercising. I have no interest in exercising and holding shares afterwards.
If the current option premium is lower than the intrinsic value of the option, does this not even out by expiration? For instance, if the option trades at .30 cents 3 days before expiry and the option is .40 ITM, does that mean that if you wait until expiration you are more likely to redeem the full .40? Or are you still hostage to the bid ask differential?
I am trying to make a decision whether to exit my position now at .30 for a 100% profit, or wait until near expiration to close out or have my brokerage automatically do it. I am trying to get .40 cents instead of .30 if possible. That would give me more like a 166% ROI.
One more note, there seems to be relatively low volume and liquidity on the particular option. This is why the bid/ask spread is .10 cents apart.
If an account CAN NOT support an auto exercise by being ITM at expiration, the holding firm CAN and WILL, AUTOMATICALLY close that position.
And my statement should have read *ASSIGNED AT ANY TIME with a SHORT in EQ's...since the only one that can exercise an option is the call/put holder.
Across the street they can close you out but it’s not automatic in the industry. You still have time to pay for the trade post the weekend exercise. You can simply put it into the googler and see firms allowed people to close out post exercise without the funds and simply be placed on restriction. It’s not automatic itm close out in the industry, maybe specific brokers but that’s a different story
Here’s ML’s options agreement and it clearly doesn’t not say they auto close out, it does say they can close out but it would be at their discretion. I know for a fact they don’t automatically do it
My brokerage says they automatically close out the position. Hopefully that means a sell to close order, not exercising. I have no interest in exercising and holding shares afterwards.
If the current option premium is lower than the intrinsic value of the option, does this not even out by expiration? For instance, if the option trades at .30 cents 3 days before expiry and the option is .40 ITM, does that mean that if you wait until expiration you are more likely to redeem the full .40? Or are you still hostage to the bid ask differential?
I am trying to make a decision whether to exit my position now at .30 for a 100% profit, or wait until near expiration to close out or have my brokerage automatically do it. I am trying to get .40 cents instead of .30 if possible. That would give me more like a 166% ROI.
One more note, there seems to be relatively low volume and liquidity on the particular option. This is why the bid/ask spread is .10 cents apart.
If your firm does sell the options on their own you might want to take action instead. Especially if the firm waits closer to expiration and they most likely would simply punch out at market. You can often place orders within the spread and get executed but the firm isn’t going to worry about that if they are blowing you out
My brokerage says they automatically close out the position. Hopefully that means a sell to close order, not exercising. I have no interest in exercising and holding shares afterwards.
If the current option premium is lower than the intrinsic value of the option, does this not even out by expiration? For instance, if the option trades at .30 cents 3 days before expiry and the option is .40 ITM, does that mean that if you wait until expiration you are more likely to redeem the full .40? Or are you still hostage to the bid ask differential?
I am trying to make a decision whether to exit my position now at .30 for a 100% profit, or wait until near expiration to close out or have my brokerage automatically do it. I am trying to get .40 cents instead of .30 if possible. That would give me more like a 166% ROI.
One more note, there seems to be relatively low volume and liquidity on the particular option. This is why the bid/ask spread is .10 cents apart.
They could mean two different things, you would have to clarify. IF your account can NOT support the position, they will issue DNE instructions OR close your position, by selling to close.
If you CAN support the position, if you're ITM by even a penny, you WILL get exercised. It's not a firm thing, it's a CBOE thing.
If it's a low volume option, I wouldn't hold my breath on getting the full value. Also depending on the strike value, that could be another reason/factor in the $.10 spread.
Across the street they can close you out but it’s not automatic in the industry. You still have time to pay for the trade post the weekend exercise. You can simply put it into the googler and see firms allowed people to close out post exercise without the funds and simply be placed on restriction. It’s not automatic itm close out in the industry, maybe specific brokers but that’s a different story
Here’s ML’s options agreement and it clearly doesn’t not say they auto close out, it does say they can close out but it would be at their discretion. I know for a fact they don’t automatically do it
Not sure what you're talking about, but in regards to your off topic post, yes you can PAY for your trade that you got exercised on the following trade date. However that means, the option was in the money and was AUTO EXERCISED by the firm, and you are now LONG the shares. You have to now pay for the shares, which you can do on the next trading day, by delivery of shares or funds, Journal funds or an equivalent security.
You need to re-read your own document. It's even highlighted in RED for you. I'll even pathway it for you. Standard Option Agreement > pg.1 > #4.
Quote:
4. As option transactions involve a high degree of risk, I understand that: a) I should not purchase an option unless I am able to sustain a loss of
the premium and transaction costs. Furthermore, if the long position on an options contract is in the money and not closed out prior to expiration, I may be further subject to the risk of being long the underlying equity position (in the case of calls) or short the underlying equity position (in the case of puts) on the opening following the expiration date. In addition, I should not write a call option unless I either own the underlying security (or a security convertible, exchangeable or exercisable into such underlying security) or am able to sustain substantial financial losses, and that I should not write a put option unless I am able to sustain financial losses b) I may not be able to close a position in the event that a secondary market in the option ceases to exist or the listing exchange restricts or suspends trading in the options
And just so that you can google more, FIRMS don't auto exercise, OCC auto exercises and notifies the firms. The firms then random assigned among the short options on their blotter. And yes, that means IT'S ACROSS THE STREET. EVERY FIRM will do this, b/c they don't have a choice. OCC notifies them & they have to comply. Now firms can also have a more stringent policy, or requirement, like margin. That can be up to the firm, but those policies are usually not an auto-exercise policy.
The Options Clearing Corporation has provisions for the automatic exercise of certain in-the-money options at expiration, a procedure also referred to as "exercise by exception." Generally, OCC will automatically exercise any expiring equity call or put in a customer account that is $0.01 or more in-the-money, and an index option that is $0.01 or more in-the-money. However, a specific brokerage firm's threshold for such automatic exercise may or may not be the same as OCC's.
Last edited by txgolfer130; 03-13-2018 at 11:08 PM..
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