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Suppose the following scenario

I have an option to buy stock X for 20,000 Shares, The break-even price is reached at price 15.00

The stock is currently trading at 14.50, the paid for option price is the difference

Suppose I like this stock and want to hold it in my portfolio

I can either exercise the option or purchase it outright on the market,

but because it is such an large share purchase I might have liquidty issues.

Will exercising my option provide better liquidity as outright purchasing the stock on the market?

  • Liquidity is provided by trading, loads of buyers and sellers. Will exercising my option provide better liquidity as outright purchasing the stock on the market? Depends on how big the market is for the shares of X. For a million of shares traded a day, 20000 isn't much. But for maybe 100000 shares traded a day yes. – DumbCoder Jun 25 '15 at 8:46
  • You can exercise the options IF the stock appreciates, but why do it now at below break-even price? – alekop Jun 7 '18 at 21:15
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Typically the options market itself is more illiquid than the share market. So you will expect some slippage on the option purchase itself, depending on your choices, this can be negligible or it may not be.

You get to assume that the person that sold you the option has already secured the necessary shares at the strike price of the option, so when you exercise they will deliver the shares to you during settlement. In this way, yes the options market will provide you better liquidity.

  • yes that is what i assumed, is it safe to say this is usually the case? – pound2strong Jun 25 '15 at 22:28
  • also as an follow up question, what legal or other recourse can I take if the option is exercised and the shares are not delivered ie naked – pound2strong Jun 25 '15 at 22:30
  • @pound2strong first of all, I guess I didn't mention, options assignment is random. The person that wrote an option is LIKELY to get assigned anytime while they are short or the day after expiration. The naked seller is on the hook with their broker, the exchange, the OCC, the CBOE, FINRA, their bank and other existing creditors to deliver, but options are assigned from the pool of people that wrote options. But the person that bought and held the option after expiration is guaranteed to get shares delivered. – CQM Jun 25 '15 at 23:19

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