| A few years ago on a Monday morning, I checked | | | | keep it for further potential increase.To exercise your |
| my brokerage account and to my surprise it showed | | | | options you need enough money to pay for buying |
| that I had purchased 1,000 shares of AMD for a total | | | | the stock. Each option contract represents 100 |
| cost of $15,000. The payment for this purchase was | | | | shares of stocks, so 10 contracts represent 1000 |
| taken out of my brokerage money market | | | | shares of stocks. In our Microsoft example, for you |
| account.Why surprised you may ask. I had not put an | | | | to exercise 10 options contracts at the price of |
| order for this purchase nor did I really intend to buy | | | | $25.00 requires $25,000 to be in your account. If you |
| AMD. I get to this in a little bit.Had I wanted to sell | | | | don't have that money, well, you may face margin |
| the stock on that day, I would have received around | | | | calls and some other not so pleasant consequence. |
| $14,500, a loss of $500 in just a few hours. In the | | | | This is where the new change can cause some |
| end it worked out and I sold that particular stock a | | | | serious damage.Options are a right and not an |
| few months later for a handsome profit.But on that | | | | obligation except that you have to deal with |
| day I had a paper loss of $500 and if I didn't have | | | | automatic exercise threshold. This is the threshold the |
| enough money to pay for the purchase, the $500 | | | | Options Clearing Corporation (OCC) uses to |
| loss would have been the least of my worries.So, | | | | determine if they should exercise your right on your |
| how did I end up with a stock that I did not | | | | behalf.In the letter I received from my brokerage |
| necessarily want or order?Automatic exercise | | | | firm, they informed me that if the price of the stock |
| threshold for equity options is the reason.Today, I | | | | is only a nickel ($.05) above the exercise price, that |
| just received the following message from two of my | | | | would mean they will automatically buy the stock for |
| brokerage firms that reminded me of that | | | | me according to this new rule.So what can options |
| day."Beginning October 2006, the Options Clearing | | | | traders do not to deal with unwanted stocks?First, |
| Corporation (OCC) will implement a change to reduce | | | | they can and should watch the stock price and be |
| the automatic exercise threshold for equity options. | | | | proactive in the process especially on the option |
| The current threshold of $0.25 will be set at $0.05 for | | | | expiration date. Option trading is not by any stretch |
| expiring options that are automatically exercised by | | | | of imagination a passive approach. They can also call |
| the OCC. The threshold for index options will remain | | | | their brokerage firm and find out what other |
| at $0.01."Who cares about a measly $0.20? You can't | | | | alternatives are available to them.Seasoned options |
| even buy a stick of gum with that.For options | | | | traders know what they should do and the aim of |
| traders this could mean a huge potential loss, margin | | | | this article is to bring some facts to the attention of |
| calls and a whole lot of trouble.Let's go over a few | | | | those who are just getting started.In investing and in |
| simple reminders about options trading. Options are | | | | life I remember what Robert Grant said, "Men and |
| contracts that allow a person to buy or sell securities, | | | | women everywhere must exercise deliberate |
| for example stocks, at a predetermined price called | | | | selection to live wisely."* DISCLAIMER: Vishy |
| option exercise price and on/or before a | | | | Dadsetan, or My Favorite Shop, Inc. do not endorse |
| predetermined date in the future called option | | | | any product or company. This article and website |
| expiration date.Options represent a reserved right but | | | | does not provide investment, legal, insurance, or |
| not an obligation. In other words, the holder of this | | | | other professional services. If investment or other |
| right, that is to say the buyer, can exercise this right | | | | expert assistance is required, the services of a |
| or not. For example if you own a Microsoft January | | | | competent professional should be sought. Although |
| 25 Call Option, it gives you the right to buy Microsoft | | | | Vishy Dadsetan has made every effort to ensure |
| for $25.00 on or before third Friday in January. It is | | | | the accuracy and completeness of the information |
| obvious that you would not exercise your option if | | | | contained in this site, it assumes no responsibility for |
| Microsoft is at $20.00. In that case, if you really like | | | | errors, omissions, inaccuracies, or |
| Microsoft, you just go to open market and buy it for | | | | inconsistencies.© Vishy DadsetanVishy Dadsetan |
| $20.00.However, if Microsoft soars to $40, then you | | | | writes articles that can actually help your clients. |
| want to exercise your right (option) and buy the | | | | Articles that make |
| stock at $25 and turn around and sell it at $40 or | | | | sense. Articles just like this one. |