Most of the time the option holder is better off by just selling the option back at the current market price. When an option is exercised any remaining time value is lost.So our first criteria as to when to early exercise is for the option to be deep in the monClicked here and OMG wow. How can you protect yourself alongside this risk. Consider this story. If this comes about, you will have wasted one half of your money.
Thus, just what should you do. You enter into a contract with ABC Company (difWWWFinance - Option ContractsWWWFinance TM Global Financial Management Option ContractsCopyright 1997 by Campbell R. Harvey and Stephen Gray.All rights reserved. No part of this lecture may be reproduced withoutthe permission of the authors.Latest Revision: February 1, 19975.0 OverviewThis class provides an overview of option contracts.
As withforwards and futures, options belong to the class of securities known asderivatives since their value is derived from the value of someother security. The price of a stock option, for example, depends on theprice of the underlying stock and the price of a foreign currency optiondepends on the price of the underlying currency. Options trade both onexchanges (where contracts are standardized) and over-the-counter (wherethe contract specification can be customized).