Q: When you close a position, do you sell the individual legs? i.e. Sell to close the stock at the lower price and then you sell to close the (protective/married) put instead of exercising the put at the higher strike price?
A: If you are looking to liquidate a Married Put position and the put still has a few months to expiration, it will always be better to Sell to Close the Stock and Sell to Close the Put, rather than simply exercising the Put option.
Why? An Option price consists of two parts: Intrinsic Value (how far In-the-Money is the option) and Time Value (the premium priced in to the option for the days remaining to expiration).
The option should always be priced at least at the Intrinsic Value. For example, if a stock is trading at $35.00 per share, the $40 strike put for that stock must be priced at least at $5.00. If the option was priced below $5.00, there would be an unfair advantage in the market.
Now, if the option expires next month, the $40 strike put may only be priced at $5.50 or so. $5.00 of that price is the intrinsic value, $0.50 is the time value. A $40 strike option on the same stock that expires 6 months out in time may be priced at $6.50 or so: Again, $5.00 of intrinsic value and $1.50 of time value.
Let’s say that I am in a Married Put position with the 6 month out option. If I exercise the put option, I only receive $40 into my account. However, if I sell to close the stock and sell to close the put option, I would receive $41.50 in my account ($35.00 for the stock, $6.50 for the put option).
If I am holding a position where the put expires in a couple days, most if not all of the time value will have decayed out of the option. If it is Thursday before an expiration date, and my put expires this month, my $40 strike put on a stock trading at $35.00 per share may only be valued at $5.10 or $5.05. In this case, I may simply exercise the put as I would only receive $0.05 or $0.10 more for liquidating the position.
I'm Kurt Frankenberg, and I have discovered how to truly put the odds on the side on the individual investor.
This brings up a good point Kurt….at what time do you get out of the put knowing that the time premium is eroding close to option expiration?…e.g. the stock goes no where and is at a price where you paid for it five or six months ago…where would you advocate selling the option then?…I did not see this discussed in any of the videos or mentioned in your blog….TY
I trade futures options and seldom am i in long futures position. Also do you ever do short trades???
can you advice — if i have sold strangles and the price levels move towards the call/put sold.. how /what is the adjustments to be done to avoid going into loss, as and when the price of the stock moves beyond the strike price of the calls/puts sold.await your commments/advice,.