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Defining Possible Outcomes Of Closing Options
Every option will be canceled by an offsetting closing transaction, by exercise, or by expiration. The results of each affect buyers and sellers in different ways. Results for the Buyer · If you cancel your open long position with a closing sale transaction, you will receive payment. If the closing price is higher than the original purchase amount, you realize a profit; if lower, you suffer a loss. · If you exercise the option, you will receive 100 shares (if a call) or sell 100 shares (if a put) at the striking price. You will exercise only when that action is advantageous based on current market value of the underlying stock.
To justify exercise, market value has to be higher than the striking price (of a call) or lower than the striking price (of a put). At that time, you will be required to pay the striking price plus trading fees, acquiring stock below current market value. · If you allow the option to expire, you will lose the entire amount of premium paid at the time of purchase. It will be a complete loss. Results for the Seller · If you cancel your open position with a closing purchase transaction, you pay the premium.
If the price you pay to close is lower than the amount you received when you opened the position, you realize a profit; if it is higher, you suffer a loss. · If your option is exercised by the buyer you are required to deliver 100 shares of the underlying stock at the specified striking price (of a call), or to purchase 100 shares of stock at the specified striking price (of a put). As a call seller, exercise results in shares being called away. As a put seller, exercise results in shares being put to you. In either case, upon exercise the premium you originally received for going short is yours to keep, and that adjusts your net cost. · If the option expires worthless, you earn a profit. Your open position is canceled by expiration, and the premium you received at the time that you sold the option is yours to keep. Tip: Analysis of the possible outcomes is the key to identifying opportunities in the options market. Risk and opportunity evaluation is imperative. Successful options traders need to be shrewd analysts.
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