<I can't at the moment foresee exactly what circumstances would make it beneficial, but putting early sure seems like a simple way to execute a sale at year end, if suddenly you enjoy the full protection of the put prior and would otherwise just be waiting to close positions. Of course, I'll have to wait to see what the transaction cost of delivery is.>
Exercising the poot before expiration is equivalent of giving away the corresponding call for free. So if you put the 10's, you're now short stock [or less long] and in the case of the stock moving above 10 you now have further exposure [if short] to losses OR less exposure to gains [if long] should that occur. Why do it???? Well if you're long the 20 puts for instance with the stock @ $7, you're carrying a $13 nut in your portfolio that has to be paid for, exercising it puts that cash in your account... or converts it to a short stock position on a $7 stock which costs significantly less to carry.
Technically speaking, if the decay in the call overnite is > the interest carry overnite, then the call is NOT an exercise... if the decay in the call is less, then it IS an exercise. Of course in figuring your call decay one must remember that you're using values based on a normally distributed stock [if you use the standard BS or binomial model] so if you have reason to believe this may be inaccurate as in the case of upcoming earnings, FDA panel, or other news, it is often simply better to wait till after that "event".
DAK |
