Question:

Can I simply instruct my broker to never exercise a purchased option?

by Guest60756  |  earlier

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Standard buying only of puts and calls. Thanks for your help!

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4 ANSWERS


  1. no need, because it is a right, not an obligation.


  2. When you own a contract, only you can exercise that contract, since this is part of the option agreement

    However you can and should give your broker written instructions that you will never want to exercise any long contracts that are held in your account.

    This will protect you and provide evidence in the event that for whatever reason your broker, another broker or a clerk in the firm ends up exercising a contract that is in the money.  

    Brokers do not take it upon themselves to exercise contracts, but it always safer to have an additional layer of protection

  3. Yes, give the broker written instructions detailing the types of transactions you wish him to exercise for you.

    The broker is your agent. If the broker exceeds his authority (your instructions), the broker can be sued for damages.

  4. Certainly you can.  

    You don't need to put your instructions in writing, but if it makes you feel better, you can do that too.  Just remember that if you THEN call and tell your broker to exercise something, s/he will require that in writing to offset the previous instruction in writing, so be sure you're always in a position to send something in writing in a timely manner.

    Or just talk to your broker.  That's generally how the business is done.

    More importantly, if you are only buying puts and calls and not planning to exercise an option, then you are effectively "betting" on the prices of the underlying asset.  The key is that while EXERCISING the options is not a necessity in order to make (or lose) money, SELLING them is an absolute necessity in order to TAKE PROFITS.  

    If you have losses, which is likely in this scenario--most call buyers, particularly, lose money--you will have your losses "served up" to you when the options expire, so no action is necessary for loss-taking.

    So while it is absolutely true that "you don't have to tell your broker anything!" as your first answer notes, you still might find it profitable to keep in contact with your broker about your plan and intentions.

    Good luck!

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