Agree Tobyh that you don't need to exercise options to trade...

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    Agree Tobyh that you don't need to exercise options to trade them.

    It's a case of making sure long options are sold BEFORE the contract expires so that in-the-money options are NOT automatically exercised by the broker after expiry.

    That presents dangers for newbie option traders in that one goes from the limited loss position of say a long call to the full risk of share ownership. If the market plummets badly the day after expiry and the shares have to be sold (due to insufficient funds in the account) - the result can be pretty brutal due to the leverage of options.

    Leaving long ITM options to be automatically exercised is a real trap for option newbies, imo. Much attention to detail is required when trading options and this is one of them.

    Set up reminders or whatever but find a way to ensure trading out of ITM options before expiry. Even on expiry day, some options that are just out of the money can quickly move ITM and they don't have to much ITM for the broker to auto exercise on your behalf.

    It is possible to ask the broker not to auto exercise - of course then you are gifting your option profit to the option seller taking the other side of your trade if does go ITM on expiry day!

    It is better to either close out before expiry day or watch it very closely on the day to close it out if necessary.

    The above is for stock exchange traded options. Company options often have their own rules and I have never traded them. Index options are different in that they are cash settled and so they do not pose the same problems outlined above. However, some brokers require you do exercise ITM index options still open on expiry otherwise you lose your profits.

    Lots of traps for the unwary! It's not so much what you know in options trading, it's what you don't know that can cause unexpected and sometimes large losses.


 
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