stock options

[edrugtrader]

i have recently obtained 1500 stock options with an exercise price of $6.30. the current value of the stock is $6.70.

i have 90 days to exercise the options, that cost me nothing.

would it be smart to take my meager profit now, or sit on the stock?

the stock in question is SSTI on NASDAQ if that matters... i'm looking for a more general concept however.

[Boris]

Tough to say. Given the short exercise window you might want to do a net exercise and then your on a free roll for any upside that might exist.

[GeorgeF]

"a more general concept "
If you look at this table of jan-05 options:
http://finance.yahoo.com/q/op?s=SSTI&m=2005-01
you will notice that the $5 calls sell for $2.4, while $6.7-$5=$1.7. The reason the options sell for more than the current price - $5 is that the option gives you a possible large gain if the price moves up.

You seem to have three possibilities:
1) Sell and get $1500 (6.7-6.3) = $600
Best if you think the stock will do poorly.

2) Sell and buy $600 of SSTI stock
Best if you think that there is a large chance of the stock doing moderately well and almost no chance of an important positive event like a takeover bid.

3) Hold on to the the options
Best if you think that there is a small chance of an important positive event like a takeover bid.

The question you need to think about is not 'will the stock increase in value'. The question is 'is there an important positive event' that might occur in 3 months that will cause a large price increase. The big money in options comes from volitility (sharp price increases/decreases).

[Paluka]

You should never exercise the options early. If you want to lock in some profit, sell some shares of the stock rather than exercising the calls.

[meow_meow]

Right. If you were to exercise the options now, you forfeit the entire time premium remaining. Sounds like these are not exchange-traded options, given the strike, so you probably don't have the option of selling the options (?).

[Skjonne]

As a matter of fact option theory says that it could be right to exercise call options prematurely if the underlying stock pay dividends.

But more important is the fact that options often trade with a relatively large spread in the market. Because of that it can be more profitable to exercise the options rather than selling them if you have concerns about the stock's future performance