Swanand

nielsendc Wrote:
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> example: i own a call option with a strike at $10
> and the underlying is $12. The value of my option
> is at LEAST $2 where if i exercise the value is
> EXACTLY $2 (aside from costs). Further, Ive tied
> up my capital by exercising.

Sure you will lose if you exercise with plenty of time left for expiration.

Get this though. Let us say the $12.50 strike call is selling for $1. Can you think of a case (real not theoretical) in which the next day, the stock is still trading at $12 but your call is worthless, with still plenty of time before expiration?

jarobi04

Equity long short hedge fund managers will almost never exercise a call option that was purchased strictly for exposure to the underlying stock's gains. There's no reason to exercise a call option when there is no cash flow from the stock for the a few of the reasons listed above.

troymo

Dreary,

Your example places the call out of the money in which case there is no debate as we would obviously never exercise when we could just buy it at the open market for cheaper.

In the case of a non-divi paying stock, there are approximately zero situations where it is more advantageous to exercise early. Consider the following 2 scenarios:

1) Your option is in the money
A) You want to pocket the profit right away: Selling to close nets more than exercising (with a tiny possible exception of same day substitution near expiry to avoid commissions)
B) You actually want to own the stock: Exercising early vs. later gains nothing since you had the option to own the shares at the strike the entire time, only now you have more capital tied up.

2) Your option is out of the money: There is no debate now because not only does exercising have 0 value, it actually has negative value.



*note: For practical purposes this entire discussion assumes standard delivery, typical trade cost structures, no market impact, etc.

scarecrow

Dreary Wrote:
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> Well said, nielsendc.
>
> My question above is not related to dividends or
> execise...just a quiz for the heck of it. The
> question restated is:
>
> Let us say the $12.50 strike call for a
> non-dividend paying stock is selling for $1. Can
> you think of a case (real not theoretical) in
> which the next day, the stock is still trading at
> $12 or more, but your call is worthless, with
> still plenty of time before expiration?


Yes: if there are less than 100 shares in the public float.

What is the point of your question

ap0258

No if there were less than 100 shares, there would not be calls to issue. The question remains.

cv4cfa

Dreary Wrote:
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> No if there were less than 100 shares, there would
> not be calls to issue. The question remains.

Do you know the answer to this question or are you just posing it to complicate things?

random_walker47

Dreary Wrote:
-------------------------------------------------------
> Well said, nielsendc.
>
> My question above is not related to dividends or
> execise...just a quiz for the heck of it. The
> question restated is:
>
> Let us say the $12.50 strike call for a
> non-dividend paying stock is selling for $1. Can
> you think of a case (real not theoretical) in
> which the next day, the stock is still trading at
> $12 or more, but your call is worthless, with
> still plenty of time before expiration?

There may be a few examples. One obvious one would be if we had zero or close to zero volatility.

Even still, in the context of this thread I don't understand your question. Not that I don't think the mental exercise is valuable, I just feel like I'm missing your point...

eoin

Yes I know the answer... I ask it here for the benefit of those who are interested in learning about real life option trading. It could also come up as a question on the exam....afterall, it's an option pricing question.

ningning1984

nielsendc Wrote:
> There may be a few examples. One obvious one
> would be if we had zero or close to zero
> volatility.

ok there you go... you do understand the question. But why would volatility drop to zero in real life situations?

RMontgomery

I don't see how a stock's volatility could drop to zero within a day's worth of trading (or absence thereof). It depends on the period of time you're using to calculate the vol. If it's an historical 30 day period then I don't see how it could plummet to the point where the option is worth zero in one trading day.