Selling The Option Lack of exercise can make your wallet fat. In practice, we never exercise our long options. This is because we can always profit sooner and bigger by simply selling the option.
Profiting Sooner Let's say we buy the XYZ Jan 35 Call for $3.50 when the stock price is $37.50, as indicated in the first graph to the right.
The graph tells that our exercise break-even is $38.50. But we're not exercising the option this time. We just want to sell it.
Assume that the price of XYZ stock goes up to $38.00, as indicated in the second graph to the far right. The option responds by going up $0.20. We paid $3.50 for our XYZ Jan 35 Call option, so we could now sell it for $3.70. That's a $0.20 profit on the option from a $0.50 move in the stock price.
In contrast, if we wanted to get a $0.20 profit by exercising our option, we'd need to wait until XYZ stock went up $1.20, to $38.70. Remember, our break-even point when exercising is $38.50. So we'd need another $0.20 increase above the break-even for a $0.20 profit. Why hold out for a $1.20 move in the stock price when we can get the same profit from a $0.50 move by just selling the option? We can profit sooner by selling the call than we could by exercising the call.
