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Strategies & Market Trends : Options for Newbies -(Help Me Obi-Wan-Kenobe) -- Ignore unavailable to you. Want to Upgrade?

To: ---------- who wrote (576)	1/21/1998 11:14:00 PM
From: margin_man	Read Replies (2) \| Respond to of 2241

<<I apologize if I butted in.>> Not at all, Doug. That's why we're here to discuss. I wasn't critizing the example. I just pointed out the potential BIG loss if one sells the same strike price c/calls using LEAPs or even few months out. From experience, it's better to sell higher strike price call options when one owns the calls which have only intrinsic value. Patriot

To: ---------- who wrote (576)	1/22/1998 10:42:00 PM
From: Madpinto	Read Replies (1) \| Respond to of 2241

Doug, I can think of three situations someone would exercise options before expiration. 1. Exercising calls for the dividend. The day before the dividend the calls may be an exercise if the put plus the cost of carry on the strike is less than the amount of the div. Owning the call gives the buyer limited loss. To maintain the same downside protection the put of the same month same strike (or higher strike if for the same price) must be purchased. The cost of carry must be given consideration because additional funds buying the stock requires additional funds which could earn interest elsewhere. If what you could have earned on the extra money until expiration and the cost of protection are less the amount of the dividend you receive by owning the stock, the calls should get exercised in most cases. 2. Put exercises for the interest. Puts can be an exercise if the interest until exp. on the short stock received by exercising exceeds the cost of the same strike same month call. Owning puts protects the owner from moves above the strike price. To maintain the protection, the call must be purchased. 3. Call exercises for long stock. Sometimes deep in the money calls with very little time left on them may get exercised so that stock may be lawfully be sold on a downtick. Only owners of stock may sell a downtick. Exercising the calls may create a long stock situation for the stock seller. This situation usually only applies to professional traders.