35 lines
2.6 KiB
Plaintext
35 lines
2.6 KiB
Plaintext
Oapter 1: Definitions 17
|
||
the difference between the current price of XYZ and the delivery price of $45
|
||
per share. If he goes short to honor the assignment, then he has to fully margin
|
||
the short sale at the current rate for stock sold short on a margin basis.
|
||
AFTER EXERCISING THE OPTION
|
||
The OCC and the customer exercising the option are not concerned with the actual
|
||
method in which the delivery is handled by the assigned customer. They want only to
|
||
ensure that the 100 shares of XYZ at 45 are, in fact, delivered. The holder who exer
|
||
cised the call can keep the stock in his account if he wants to, but he has to margin it
|
||
fully or pay cash in a cash account. On the other hand, he may want to sell the stock
|
||
immediately in the open market, presumably at a higher price than 45. If he has an
|
||
established margin account, he may sell right away without putting out any money. If
|
||
he exercises in a cash account, however, the stock must be paid for in full - even if it
|
||
is subsequently sold on the same day. Alternatively, he may use the delivered stock to
|
||
cover a short sale in his own account if he happens to be short XYZ stock.
|
||
COMMISSIONS
|
||
Both the buyer of the stock via the exercise and the seller of the stock via the assign
|
||
ment are charged a full stock commission on 100 shares, unless a special agreement
|
||
exists between the customer and the brokerage firm. Generally, option holders incur
|
||
higher commission costs through assignment than they do selling the option in the
|
||
secondary market. So the public customer who holds an option is better off selling the
|
||
option in the secondary market than exercising the call.
|
||
Example: XYZ is $55 per share. A public customer owns the XYZ January 45 call
|
||
option. He realizes that exercising the call, buying XYZ at 45, and then immediately
|
||
selling it at 55 in the stock market would net a profit of 10 points - or $1,000.
|
||
However, the combined stock commissions on both the purchase at 45 and the sale
|
||
at 55 might easily exceed $100. The net gain would actually be only $900.
|
||
On the other hand, the XYZ January 45 call is worth (and it would normally sell
|
||
for) at least 10 points in the listed options market. The commission for selling one call
|
||
at a price of 10 is roughly $30. The customer therefore decides to sell his XYZ
|
||
January 45 call in the option market. He receives $1,000 (10 points) for the call and
|
||
pays only $30 in commissions - for a net of $970. The benefit of his decision is obvi
|
||
ous.
|
||
Of course, sometimes a customer wants to own XYZ stock at $45 per share,
|
||
despite the stock commissions. Perhaps the stock is an attractive addition that will |