HOW TO USE OPTIONS

[abhishreshthaa]

Introduction to Options


Early exercise of options


Early exercise of Call Options on non dividend paying stock is never optimal because:


- Interest earnings

- Stock price less than strike price on expiry

(both applicable in case of delivery settlement)

- Beneficial if sold in the market to earn the time value




It is optimal to exercise Call Options on dividend paying stock


On ex dividend day the stock price falls by the amount of dividend


Fall in the stock price on ex dividend day makes the call option less attractive


Early exercise of deep in the money Put Options is optimal on non dividend paying stock:


- Interest earnings


- Beneficial if sold in the market to earn the time value only if the interest earned from today to expiration upon the exercise exceeds the time value


It is optimal to exercise Put Options on dividend paying stock just after the stock goes ex dividend



On ex dividend day the stock price falls by the amount of dividend



Fall in the stock price on ex dividend day makes the Put option more attractive

 

[jitendra05]

Introduction to Options


Early exercise of options


Early exercise of Call Options on non dividend paying stock is never optimal because:


- Interest earnings

- Stock price less than strike price on expiry

(both applicable in case of delivery settlement)

- Beneficial if sold in the market to earn the time value




It is optimal to exercise Call Options on dividend paying stock


On ex dividend day the stock price falls by the amount of dividend


Fall in the stock price on ex dividend day makes the call option less attractive


Early exercise of deep in the money Put Options is optimal on non dividend paying stock:


- Interest earnings


- Beneficial if sold in the market to earn the time value only if the interest earned from today to expiration upon the exercise exceeds the time value


It is optimal to exercise Put Options on dividend paying stock just after the stock goes ex dividend



On ex dividend day the stock price falls by the amount of dividend



Fall in the stock price on ex dividend day makes the Put option more attractive

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