options, page-2

Hi antpat,

Welcome to the world of options.

I think that Q1 should read, "Do you have to close out...or exercise....?" Answer: You can make money either way, depending on the situation.

For Q2, you need to be able to distinguish between a "put" and a "call", and the "rights of the taker" and "obligations of the writer" pertaining thereto.

It seems that you are referring to the exercise of a call option, in which case you (as the taker) would have paid the writer an initial premium; then on exercise, you would further pay the strike price of the option multiplied by the number of shares. In return, you would take delivery of the shares which ought to have a market worth more than the amount paid on exercise... otherwise you would not exercise in the first place.

In the case of a put, you (as the taker, having paid the premium) could exercise your right to sell shares, but you wouldn't do this unless the market worth of the shares is less than the exercise amount.

The exact circumstances for rational exercise of options is another matter...

You may also make money by closing out a position. For example, if you have taken/bought/gone long an option you would have paid a premium. If you are later able to write/sell/go short the same option and receive a higher premium, you can profit by doing so.

Check all this with your broker/tutor, or find a book on the basics of options.... I'm prone to make errors :o

GK