Options Trading Tutorial

Sell to close or excercise call option?

When someone buys a call option, they can either choose to excercise it or sell the option to close their position. When excercising the option, they must make sure the price of the stock is above the break even point (strike price plus premium) to profit. However, even if the price of the option contract has risen only slightly above the price that they purchased it, they still profit if they sell the contract. There is no break even point in selling the contract, it just has to go up, right? In general, is it usually more profitable to sell the option contract to close out the position instead of excercising it because when excercising it the stock must go up enough to rise above the break even point? What would be the incentive to excercise the option considering it involves significantly more capital vs. selling the option which gives you virutally the same if not greater profit?

Public Comments

1. The reason to actually exercise an option is if you want to own a position in that stock-- for example assume you bought august 120 calls a month or two ago. You could simply turn around and sell the options for a tremendous profit if you have no long term interest in holding Apple stock--however if you think Apple is a good long term investment you can use the options to buy shares at a tremendous discount to their current price. Also you shouldn't bother to exercise an option before it's expiration date (ie when the time value of the option is exhausted) as doing it earlier is a waste of money. If you want to get out of a position before an expiration date just sell the option.