Options A to Z - Exercising Options in Think or Swim

[6heelfan]

correct me if i'm wrong, but there are situations where you would want to exercise the call early even with no dividends. For example: I buy the $100 at the money call and the stock rallies to $120. I have reason to believe that stock is now overvalued and will probably drop back to the $110 range. Am i not better off to exercise the option and sell my position immediately rather than wait and pay $100 for a stock that is now trading at $110 instead of the ealier $120?

[LeoAdd0]

Cool vid. Dumb it down a bit more. I feel there's a touch more that wasn't explained in depth. I don't think if one were intelligent enough to understand the way the concept were explained, they wouldn't be perusing vids on youtube.

[dnichols24]

so never lucrative to exercise a call before expiration except for one situation? dividends? what about if you are short stock and the price keeps running above your covered call strike??????? wouldn't you want to exercise if the stock ran up $5 above your call strike and short entry point?

and if you exercise on the expiration day in the money you get to keep the premium?

[optionsatoz]

Assume you short stock at $45 and buy a$50 call for protection. The stock is now $55 and the $50 call is trading for $6 ($5 intrinsic, $1 time value.). If you exercise the call, you'll pay the $50 strike which leaves a $5 loss. But if you close the call, you collect $6. You could then pay the $55 market price which leaves you with an effective price of $55 - $6 - $49. Your loss is now $49 - $45 = $4. You are $1 better off by selling (not exercising). By selling, you collected the $1 time value.