From the May 01, 2012 issue of Futures Magazine • Subscribe!

Trading early exercise options on the OEX index

It’s never too early for (OEX) exercise

We are now finished with the trade and can phone in our intent to exercise the 625 call to the brokerage firm. Let’s see what kind of profit we made from this trade:

  • Sold cash out through exercise at $637.31
  • Bought synthetic stock for -$636.35
  • Bought 625 strike garbage put for -18¢
  • Net profit: 78¢ minus commissions. 

We have gone through what appears to be a complicated procedure for a small amount of money, but keep in mind several things:

  1. The more you practice this, the more intuitive and easy it will become.
  2. Though 78¢ does not seem like much, it is $78 per contract, so 10 contracts would make you $780 minus commissions.
  3. This is a net of $780 more than you would have received had you not done anything and simply waited for the entire position to expire at cash the next day. In short, this is as close to free money as you will ever get in trading.
  4. This is an average exercise, and in volatile conditions, the profits can often be several dollars instead of 78¢. Obviously you will need to work in your commission cost before deciding which early exercise opportunities to exploit. 

The difference between a good trader and a great trader often is measured by just a few extra tools in his tool box. The early exercise OEX strategy is a valuable tool that can make a major difference in the bottom line over time. 

Ann M. Castaneda is the director of the International Division of Random Walk LLC is a stock and option education company. 

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