I was looking into buying some options for INTC (intel), just 100 to get my feet wet.
When i went to my broker, i had the option to "buy to open" or "buy to close"
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ahhh just what i was looking for a tutorial lol.
thanks a lot bud.
You see I understand you can buy and sell an option, but you also have the bility to buy an option, exercise it at the strike price and sell it at the price it's at.
I want to make a decision based on whatever offers more profit (minus commissions)
I'll read this tutorial ASAP as well as the one on investopedia.
It is almost always more profitable to sell the contract instead of exercising it. Contracts hold extrinsic value, which is the combination of implied volatility and time remaining that
is actually factored into the price making it more expensive. If you exercise a contract before the expiration date, you would be losing all the extrinsic value that it was holding. Quick example:
ABC is at $25
You have $22 strike call contract valued at $3.50.
If you exercise, you get 100 shares of ABC at $22, it costs you $2200 but they're worth $2500 on the market. So $300 profit.
If you just sold the contract, you would be getting $3.50 per share because you get to sell the extrinsic value as well. $350 profit.
The main exception is say you hold SPY calls that are about to expire. You want to continue being long anyway, so for commission reasons it make more sense to exercise the contract and keep the shares, instead of selling the contract and then rebuying shares right there after. Wouldn't make sense.