Option Trading Articles: Re: [ConservativeOptionStrategies] When to exercise options vs buying/selling underlying

Monday, June 14, 2010

Re: [ConservativeOptionStrategies] When to exercise options vs buying/selling underlying

two things lou

YOu can't exercise a put unless you own the stock. It gives you the right to "put" the shares

to someone else. they have to buy them, and pay you, the strike price.

Typically, you would buy 100 shares, and buy a put as protection.

Buy the shares for 50 (5000) and buy one put contract strike of, say, 50.

The stock goes to 35 on bad news, and the put allows you to force someone else to buy the shares at 50.

The 50 put you own is insurance against a drop in share price.

Second, the value of the put contract goes up (when the stock goes down) according to it's delta.

If the delta is 55, and the stock drops $1.00, the put contract goes up $.55 (delta of 55)

If the delta were 72, and the stock drops $1.00, the put goes up $.72.

It would be a really good thing to understand the Greeks....delta, gamma, theta, and vega.

They will help alot in understanding why prices change the way they do.

Will also help keep you out of trouble, and will help construct conservative strategies.

On Jun 14, 2010, at 8:11 PM, Louis wrote:

My basic plan was to buy and sell options only. However, the Greeks have such a strong effect that it may be better to exercise a winning option and take profits that way.
For instance, I have a strangle on BP (long call @37; long put @34)which I purchased on 6/9 for $2.18.
The stock today fell to 30.67, so if I exercised the put and resold the stock I'd have a profit of $307 less 218, net of about $89. The 34 put on the other hand is being bid at 3.65 and the 37 call at.07 which would net $154, so that decision would appear to be pretty straightforward.
But I haven't been watching the day to day changes in option values and something is not adding up for me.
I bought the put @ 1.43 when BP was at $34+, so the stock has fallen about $4.00 while the put has increased only 2.22. I don't think the time decay and bid/ask spread would explain the difference. Putting together the fact that overall the option sale would be better at this moment, but nevertheless overall the put moved considerably less than the stock, something seems out of synch so that at some point between now and june 9th it may have been better to exercise the put.
Either I am missing something very obvious or over analyzing, or there are points at which one method is better than the other.
Any ideas?
Lou