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