Do Not Exercise Options Early - Here is Why

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Should an Investor Hold or Exercise an Option?
When is it time to exercise an option contract? That's a question that investors sometimes struggle with because it's not always clear if it's the optimal time to call (buy) the shares or put (sell) the stock when holding a long call option or a long put option.

There are a number of factors to consider when making the decision, including how much time value is remaining in the option, whether the contract is due to expire soon, and whether you really want to buy or sell the underlying shares.

Right to Exercise Options
When newcomers enter the options universe for the first time, they usually start by learning the various types of contracts and strategies. For example, a call option is a contract that grants its owner the right, but not the obligation, to buy 100 shares of the underlying stock by paying the strike price per share, up to the expiration date.

Conversely, a put option represents the right to sell the underlying shares.

The important thing to understand is that the option owner has the right to exercise. If you own an option, you are not obligated to exercise; it's your choice. As it turns out, there are good reasons not to exercise your rights as an option owner. Instead, closing the option (selling it through an offsetting transaction) is often the best choice for an option owner who no longer wants to hold the position.

Obligations to Options
While the holder of a long option contract has rights, the seller or writer has obligations. Remember, there are always two sides to an options contract: the buyer and the seller. The obligation of a call seller is to deliver 100 shares at the strike price. The obligation of a put seller is to purchase 100 shares at the strike price.

When the seller of an option receives notice regarding exercise, they have been assigned on the contract. At that point, the option writer must honor the contract if called upon to fulfill the conditions. Once the assignment notice is delivered, it is too late to close the position, and they are required to fulfill the terms of the contract.

The exercise and assignment process is automated and the seller, who is selected at random from the available pool of investors holding the short options positions, is informed when the transaction takes place. Thus, stock disappears from the account of the call seller and is replaced with the proper amount of cash; or stock appears in the account of the put seller, and the cash to buy those shares is removed.

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#OptionsTrading #CoveredCalls #ExercisingOptions
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DISCLAIMER:
This video is for entertainment purposes only. I am not a legal or financial expert or have any authority to give legal or financial advice. While all the information in this video is believed to be accurate at the time of its recording, realize this channel and its author makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in this video.

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[JakeBroe]

Give this video a LIKE to support my channel! Also check out my entire playlist on Trading Options here!

[hnwnhgf]

Hi I love how you really want to help people understand without trying to sell the training programs like most of these "gurus" on YouTube. As of April 9, Costco is at 363.21 exceeding your breakeven point of roughly 332. Can I asked you what your plan is for this call? I just saw you sold the underlying shares but kept the option on your challenge day 59 posting. What will be a good move from here?

As TMI - I am Korean who learned English from fine young American teachers (like you) many years ago. Your Korean themed window shades put smile on my face ;)

[AMo]

Great video, Jake. I am getting way more into this and ready to start trading options myself. My only question is understanding when shares are involved. I know you can buy and sell contracts all day, but at some point, someone has it when it expires and shares are involved. It always confuses me when you start to use buy to open or sell to close in reference to long call or short call.

[ATLJB]

2 dates you want to pay attention to when selling options. Earnings, and Ex Dividend. If the option is in the money, you can guarantee it will be exercised the day before ex dividend date. Why? So the buyer can collect the dividend, thereby lowering his break even.

[matthewsherwin]

Jake thanks for yet another great video! You’ve done your usual outstanding job and you’re rather modest to say you think you’re beginning to master this. You’re very well versed at this and the greeks. Frankly I remember my years working as a telemarketer and sales assistant on Wall Street and there were licensed stockbrokers who didn’t have such a good grasp of all of these topics! Greeks can be a little tricky. Fortunately I am studying them and learning quite a bit. I don’t know to what degree I’ll use all of these ideas in trading options but I believe I should know this thoroughly in order to have a true command of options and to be qualified for options trading. Please keep these videos coming and if possible please make a video on the wheel strategy. Have a great day, Matt 👍👍👍

[wolfgangi]

What a timely video I was just wondering about this question.

However, I still have a question, what if it's only days away from expiration how likely will the option holder exercise their options?

[hadassi]

Thanks for another great video (which I am sure will sink in someday)!
I must be missing something because I would say that if I buy to open for $1675 and sell to close at $2367 - doesn't that mean I am left with only $692?
Hope you will be able to explain :)

[crippledgenius]

Yeah I agree close if you want profits I never exercise anyway great to see you showing people options I learned it all with books and getting burned hard video format is great for the newer stuff

[stephenharris]

Enjoyed your video but to be clear. If I buy a long put or call for that matter and the market takes off in the opposite direction I should not close the option early to capture as much of the market value left on what is becoming a losing trade?

[nottheone]

PLEASE RESPOND: So during a squeeze, and im heavily in the money, wouldn't it make sense if i just sold the contract? especially if i don't have the money to excerise the option?

[SanjayS-fjzl]

Can you buy CALL OPTION ITM and exercise it right away (eg 2 weeks before expiry date) to own the stock? If yes, Can I also sell CALL (Same expiry or future date) OTM ? Basically Vertical spread but with two separate legs? Thank you

[raymondsimmons]

Great video. Thank you Jake. Everything in this video made sense to me. In a nutshell, you are saying that exercising early is bad because you are taking less money than the market value of the option.

[rgash]

You are the best teacher I have found. Nice videos

[mrwsilva]

The timing of this video is spot on for me. I actually sold my very first put (60 days out) earlier this week on DFS and made big gains from it in just three days and thought about locking in those gains by buying to close today. I'll take this video as a sign and hold on to it a bit longer, maybe to 80% of it's value like you've mentioned in your videos.

[vp]

Nice video Jake. I am confused here. You have compared the market value of the call option without subtracting the acquisition cost of the option to net PnL upon exercising the call option.
Net PnL Comparison should be with $691.95 (Current market value - Purchase cost of the option). In that case you would be making more money if you exercise early or on the expiration day. Any thoughts?

I exercise in the money options early especially with stocks that pay high dividends and ex dividend date is prior to contract expiration date and sell OTM covered calls against fully paid shares to generate even more income. I have had no issues getting short changed.

[Superchef]

What happens when I'm in the money and the contract expires?

[bobdi]

Jake, on a vertical spread, what do I do if I get pinned is there a reasonable remedy. If you cannot do something then the rationale that a covered call requiring the trader to own the shares before the trade is not true.

[tolkienhk]

If you sold the call option the profit would be simply $2, 367.50 - $1, 675.65 = $691.85. So $878.00 profit if you exercised the call option is not a bad result at all.

[alicegiang]

Thanks Jake for doing this!
I had an position on Xone in March 1st. I had to roll it to May 31.
Yesterday my G/L was about $50. Because the market was down. Today market went back up. And my G/L was $160.
I was thinking if I close my position I will take some profit. If I leave it till tomorrow. When the market go down. I may only back to $50 again.
I was thinking if I close it. Then re open Xone again when the market is down so I can defend my trade better. I hope u can understand what I try to say.
My strike was $30. I sold a put on March 1. Please let me know if I give u enough info

[MrNetsecure]

I don’t understand. Are exercising and sell to close different? How exactly do u exercise a contract if not sell to vlose