Stock Options

Offsetting Transactions

It is extremely important to note in options trading that what we’re going to do is calculate the exercise value of the options. You do not need to exercise your option in order to realize a profit (e.g., turn a profit on paper into an actual profit in real dollars and cents).

As noted earlier, Stock options are traded on major stock and commodity exchanges world wide. Traders buy and sell options all the time. Almost always, Stock options trade at or above their exercise value (there are some rare exceptions).

Because of this, if you had an option that had an exercise value of, say, $400, you could pretty much guarantee that instead of exercising the Stock option, you could sell it on one of the options exchanges for at least $400.

When you sell a Stock option that you’ve already bought, it is called an offsetting transaction.

You can also short sell Stock options. That is, you can sell them at the inception of the trade and buy them back later.

If you sell an option short, the transaction to close out the Stock position is a “buy” or a purchase”. That purchase is also called an offsetting transaction.

Because of the availability of offsetting transactions, few opiums are ever exercised. Almost all options are offset.

Stock Options that are bought are usually sold, and options that are sold short are usually repurchased. The ability to offset an “opening” transaction via a “closing” transaction is an important feature that makes it simple to trade options without worrying about the headache of actually exercising the option.

Stock Options