Buying an Option
Buying an Option
Your impression is correct. If you own a call option and then sell it, the position is closed. You are under absolutely no obligations. Although you did not ask, if you sell a call option, and later buy it back, then any obligation to deliver the shares is canceled. Again, the position is simply closed.
The question is not dumb. Here's how an exercise/assignment works. The buyer of an option has the right to exercise any time before the option expires. If the option owner exercises, someone who owns a short position (i.e., someone who sold the option and has not yet bought it back) is chosen at random (by the OCC - the Options Clearing Corporation) and must fulfill the conditions of the contract. If it's a call option, the person assigned an exercise notice must deliver 100 shares. If it is a put option, the person assigned must buy 100 shares.
Note: the assignment is random. The person who sold the option to the exerciser is not the person who receives the exercise notice.
And yes, you can sell any option you own, any time before it expires - for either a profit or a loss - and you incur no obligtions by doing so.
I am studying options as part of my Practical Investment Management class as CSUF.
My questions is, I am sure a simple one, but never the less one that confuses me. If for instance, I buy a $5 Nortel Call at 10 cents and the following day the same call is trading at 15 cents, can I sell that call for profit. In
doing so am I then responsible to deliver shares if the buyer exercises or is that the responsibility of the original
call writer. This really confuses me because the book makes it seem as though if I buy a call and then sell it, I am now obligated to honor that call should it be exercised. But, I was under the impression that if I buy a call and then sell it, the position is simply closed.
Sorry if this question seems dumb, but the options portion of the class is really confusing.
Thanks for the help.