Sell Call Option Underlyings?

Question

I own a Call Option for Scholastic Corporation (ticker:SCHL). It is a March 2007 Call Option with a Strike price of $35.00 My broker told me that i "Cannot sell something that you do not own". I only have the call option contract. I do not have a margin account. How can i sell the underlying stock shares (to make the investment return worth $3,500.00) if i do not have margin? Or if it hits the strike price can i "BORROW" anything, from the broker, to sell the underlying stock shares? This is the first call option i have owned, and if it hits, i would like to get the full value. Thanks

Answer 1

Right now, you have no underlying stocks to speak of.
What you do have, is a right to purchase stocks, hopefully at a discount, unless you are hoping to short sell.

Call Option: a right to buy, fixed at $35 of SCHL, within a specific time period, upon exercise, the other party is liable, to sell the equity/shares to you. Buyers of calls hope that stock will increase substantially before the option expires.

Put Option: Put writers (sellers), however, are obligated to buy or sell at specified amount of xxx shares at a fixed price within a specified time. This means that a seller may be required to make good on a promise to buy or sell. Buyers of puts hope that the price of the stock will fall before the option expires.

Which is to say that you hope to buy SCHL stocks at the price fixed, hopefully lower, than the market price of SCHL stock. e.g. you can buy $35 of SCHL, $45 market price of SCHL, you exercise the option (buy SCHL stock) and make gains of $10 difference, before deducting cost of the Call Option and commission fees incurred. What you then own is the underlying stock, $45 SCHL a piece, purchased at a discount, which you may want to sell at $45 or keep for future in the hope that stock price rises, and then taking profit.

Alternatively, you could just sell the option. Roots has a point.

Answer 2

Hello,

Some confusion here. You can't sell the stock because what you own is the option. As stock rises, the call option you own will rise also. In the end (just prior to march '07 expiration), if the option is in-the-money it's usually more efficient to sell the option. You will get "the full value." This will not be 3,500.00. It will be the amount, if any, by which the stock price exceeds the strike on the last day of trading prior to expiration, plus or minus a tiny amount.

In the meantime, between now and march '07, market price of your option will fluctuate as stock fluctuates, but not exactly as stock fluctuates. It will differ from stock fluctuations by interesting but difficult-to-grasp mathematical progressions expressed in algebra.

In practical terms, without the algebra, you can observe this by checking the BA (bid/ask) of your option every day against the stock price. Observe how your option moves in relation to stk.

Keep in mind that if stock is below strike at expiration, your option will expire worthless. Keep in mind that the "time value" in the option premium will start to decay rapidly as expiration date approaches.

You could visit your community library and borrow books, but better yet is to visit the CBOE and Yahoo options websites. Both are virtual libraries packed with instructional materials for everybody from the beginner to the most advanced. CBOE has a virtual trading tool so you can play with imaginary trades and learn without any risk.