rkapoor

Kia's right....you never exercise an american option (or european option) that isn't in the money.

Also, you may exercise early if you've had a significant move in the underlying position. Let's say the stock you buy a call with a $25 strike is trading at $50 within 2 months of purchase, you say, wow what a move in my favor I didn't think it would go that high, I'm more than happy to sell my shares at $50. So you exercise the stock early, sell at $50 and you're out of the position. A week later it falls back down to $45, by not exercising your option and selling the shares you lost out on $5 in profit.....so the time component in options is a built-in premium, but you also have to consider that it can work against you for positions in the money.

rkapoor

I don't get it. I'm pretty sure it's normal for options desks to mark their positions at mid. So, if they sold at a bid price, they would have to recognize a lost.