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Cover Call and Option Exercise

April 18, 2012 | Comments: 0 | Views: 101

A call option will essentially give you the right to acquire a specific underlying stock, at a particular rate whereas a put option gives you the rights to dispose off any underlying stock at a particular rate. Each and every owner of any option contract is free to exercise it, at any given point of time, demonstrating that this financial transaction that has been specified under the contract, has to be enacted straight away between the two parties to the contract. Alternatively you may sell these underlying stocks while you are still holding the put options. As a result, this contract itself comes to an end. At the time of exercising a call, an owner of the option buys an underlying share at its strike price through the options seller, whilst for a put, an owner of the options will sell this underlying stock to an options seller.

In Options Trading, option exercise means to put into effect your rights to purchase an underlying stock when you are holding a call options otherwise to sell this underlying stock when you are holding a put option. Well, a Call option will give you a right to purchase an underlying stock at a specified rate whilst a put option will give you a right to sell an underlying stocks at a specified price, however that right will not occur automatically earlier than the expiration of that option. Thus, options are known in the financial language as a "Contingent Claim". This means that a claim is considered to be contingent on its holder. Here the holder will determine whether he wishes to enforce his rights or not and this process is recognized as an "option exercise".

Options aren't generally exercised early because early exercise results in the surrender of time value of the holder and so it generally does not occur. Owner of the option may decide sell the call in order to capture the time value. At the same time early exercise does not really make any sense in case considerable time value is remaining.

Every investment strategy, which has been related to any investment in options, is known as a Cover Call. However on the other hand, an Options is a specific derivative that goes together with any forward contract, any futures contract, as well as any swaps and other benchmarks. Similarly like in the case of any derivative, they have a hold on an underlying asset. One of the most well-known options underlying asset is a stocks option. Here an option is referred to as a stocks option.

All the investment strategies, that are co-related to a specific investing of options, are referred to as a Cover Call.

Source: EzineArticles
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