To: Cents who wrote (695 ) 2/16/1998 1:36:00 PM From: Madpinto Read Replies (2) | Respond to
tttanna, I will attempt to answer your questions. (Please remember, I do not recommend any specific course of action. These examples are for informational purposes only and may not be complete.)I bought some AOL Feb110 puts at $3.50/shr. Please check your purchase. I saw AOL Feb 110 puts trading at about 1 ¬ on Friday. This could cause you to make a mistake. Come expirations on Friday, can someone please explain to me what my choices are should AOL stock price ever approach or even goes under my strike price. You have quite a few choices. Most simply, you can sell your puts at the existing bid and receive that amount less commissions. Next, you can exercise your options. You probably would only want to do this (as a put owner) if the stock falls below your strike price at expiration. However, you may inform you brokerage firm of your intention to exercise options up until 2 hours after the stock closes on the last day of trading before expiration. (Note: Expiration falls on the 3rd Saturday of the month.) You might want to do this if the company issues bad news after the close of trading. You will pay stock commissions on the stock you sell by exercising, and you will pay commissions again when you buy the stock back. You also must provide the funds required by your firm to short the stock. Check exercising policies with you brokerage firm. Different firms have different rules and the 2 hour policy may not apply in your case. Another possibility involves buying the stock before expiration. For example, let's say the stock drops to 105 and the puts have a market of 4 3/4 to 5 1/8. You could buy stock at 105 and have a gross profit on your options of 5 instead of 4 3/4. Again you would have to pay double commissions and you must put up enough cash to cover the stock purchase. You get an added bonus though. If the stock rallies back up past 110, the puts become worthless but the stock continues to make you money. You don't lose anything on the puts because you bought the stock lower, but the stock helps you (above 110). Another possibility is to "spread off" the options. You could sell puts on a lower strike for instance (if you have clearance at your trading firm). Let's say the Feb 105 puts trade up to 4 «. You could sell them and have the $5 spread on at a $1 profit to you except for commissions. If the stock closes below 105 you will make an additional $5. If it closes above 110 you still make your $1 and if it is in between 110 and 105 you can do the math. (I.e. 108. 110 - 108 = 2 + 1 = 3) You risk having to worry about two strikes instead of one and selling puts creates an obligation you should fully understand. Also, factoring in commissions is necessary here as you may have to pay commissions on both strikes. Buying calls at a lower strike is another way to spread the puts off, but again you may open yourself up to paying additional commissions. As you can see, you have many choices. Please do not take any of these examples as recommendations.I've read that Etrade automatically exercises your option for you when you are in the money. I believe they will exercise your options if they end up « point in the money or more. Please confirm this with your firm.
