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Ask Alan – Exercise of In-The-Money Options

Alan answers a question from William of Manteca, CA. William asks:

“What triggers an in-the-money strike in the following example? I purchased Home Depot stock for $22.25 per share and sold the $20 in-the-money call for $3.50. (Not bad.) On or before expiration Friday the share price never hits $20 but falls, let’s say, to $20.05. Would the buyer exercise the option, or is he, by contract, forbidden to do so?”

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About Alan Ellman

Alan Ellman loves options trading so much he has written three top selling books on the topic of selling covered calls alone. He is a dentist by day, a personal trainer, successful real estate investor, but he is known mostly for his profound stock option strategies.

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9 Responses to “Ask Alan – Exercise of In-The-Money Options”

  1. Alan Ellman October 10, 2012 7:47 pm #

    Best time for trading:

    A premium member from Australia asked about when to be available for trading while referencing the time difference between countries. My response:

    Here are the key times for covered call trading:

    1- Opening new positions: Between 11AM and 3 PM EST. This will eliminate the trading volatility often seen in early morning and late afternoon trading.

    2- Rolling options on or near expiration Friday: Wednesday, Thursday or Friday of expiration week. Best the closer to 4PM EST because time value decay for the near term option is greatest as 4PM is approached but the far term option is nominally impacted so the credit will be greatest closer to 4PM.

    3- Exit strategies: Once your positions are established you can put in BTC, GTC limit orders for your short option positions based on the 20/10% guidelines I describe in my books and DVDs. Ask your brokerage to send you an email if executed so you can decide what the next step is. All scenarios are explained in my books and DVDs.

    This is my recommendation to ALL members, US and international.

    Alan

  2. Alan Ellman October 11, 2012 3:21 pm #

    The options lady interviews a flight attendant:

    http://www.theoptionslady.com/Blog.html

  3. Alan Ellman October 11, 2012 5:15 pm #

    Premium members:

    This week’s 6-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site.

    For your convenience, here is the link to login to the premium site:

    http://www.thebluecollarinvestor.com/member/login.php

    NOT A PREMIUM MEMBER? Check out this link:

    http://www.thebluecollarinvestor.com/membership.shtml

    Alan and the BCI team

    *** I was invited to present a workshop at the Money Show’s Stock Traders Expo @ The Marriott Marquis Hotel in NYC this February. Hope to see you there- Alan

  4. Nick October 11, 2012 5:39 pm #

    Alan and Barry,

    I am a new premium member and if I’m reading the stock report properly most of the stocks are not eligible for the upcoming November options due to earnings release. Am I reading this correctly and if so how do we handle next month? Thanks for your excellent service.

    Nick

    • Alan Ellman October 12, 2012 6:13 am #

      Nick,

      You are accurately reading the report as stocks AMGN through CYBX are projected to report prior to the expiration of the November contracts. This comes up four times a year. This issue can be negotiated by:

      1- Using the 16 eligible stocks
      2- Using stocks that report early in the cycle AFTER the report is announced as long as the stock is still eligible
      3- Using securities from the BCI ETF report

      Here is a link to an article I previously published:

      http://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season/

      Alan

  5. Mike Witkowski October 14, 2012 12:41 pm #

    Alan,

    In your books you say that Jim Cramer is a good source for stock picks. In his latest book Cramer says buying calls is the way to go. I have had some success but more losses using this theory. After I lose the money I have invested this month in buying calls I am coming back from the dark side. Selling covered calls seems to be much safer.

    Thanks for your help

    Mike

  6. Alan Ellman October 14, 2012 2:35 pm #

    Mike,

    I agree with selling calls while owning shares is a safer way to go. When I alluded to Cramer as an additional source for locating equities it is with the caveat that we still must run those recommendatioins through our own fundamental, technical and common sense screens. As Cramer says, “do your homework” even after a “buy-buy-buy” rant. As far as buying naked calls, this is a strategy where time decay is working against us. Options expire while stocks do not (okay some rare exceptions!).

    Alan

  7. Al eblis October 18, 2012 5:38 pm #

    What happen to the In the money answer.

    Thanks

    • Alan Ellman October 18, 2012 6:14 pm #

      Checking into it now-Alan

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