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Learn Option Trading. Trade Options Online.

 
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When to Exercise

As an option holder, you have a right to exercise your option and complete a transaction on the underlying stock at the option’s strike price.  You will want to exercise this right only on occasion.  Most of the time, instead of exercising an
option, you will simply want to close your position when it is profitable to do so.  To close your option position, you will make a trade on the open market and either “sell to close” or “buy to close” the option -- depending on whether you are long or short the position. 

There are certain instances, however, when you will want to exercise your option:

  • You want to own the underlying shares at a cost basis equal to the strike price
  • You are assigned on a short option (one you wrote) that is part of a multi-leg trade spread strategy where you hold a corresponding long option as a hedge
  • You are exposed to more risk than you are allowed to handle based upon your option approval level (a mandated exercise)

How to Exercise

To exercise an option, you will have to call your broker on the telephone.  Be prepared to pay a higher commission to exercise an option.  Also, if your account does not have enough buying power to complete the transaction on the underlying stock, and you still want to exercise the option, you can instruct your broker to exercise the option, take delivery of the shares, and then sell those shares immediately on the open market.  That gets you around the liquidity crisis.

Profile-B-WTrade Note from Peter

When you place you order, I would recommend that you only use limit orders.  Try setting your limit order at the mid-point between the bid and the ask prices. Sometimes you have to round up to the next increment of a nickel, but always place a limit order.  Maybe it won’t get filled, but that’s OK.  There ‘s always another options trade.

Signature---Peter

Back in the Chain Gang

Even if you don’t like The Pretenders, the option chain is an integral part of the option trading experience.  It is a table of data across various strike prices and multiple expiration months. Often key metrics (IV and Delta) are included within the option chain.

Alternative to Chains

Most traders use option chains to evaluate trading opportunities.  An alternative to trading from a chain is to trade from a strategy analysis tool.  With these tools, you start with an idea or a general sentiment. You decide whether the stock will go up, down or stay the same.  From there, you pick a strategy (e.g. spread, butterfly, condor) and analyze the profit  potential of the strategy directly within the tool.  Once you are satisfied with the profit potential of your trade, you put it on directly from the tool -- bypassing the option chain altogether.

Option Chain - TradeKing

Sample chain from TradeKing - Calls and Puts View
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