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Paul
Posts: 6604
Joined: July 20th, 2001, 3:28 pm

Re: exercise vs sell of an asset

March 10th, 2017, 8:47 pm

I just wrote a long post which I deleted.

This is quite an upsetting thread.

outrun, you are wasting your time. It's not even a challenge. It's just not going to happen.

List, is anything about this thread and others helpful or hurtful in any way? I read your comments and I want to say some pretty horrible things to you. But I'm biting my tongue. I suspect that in real life you are a pleasant man but that much of the world is confusing to you. And I don't want this forum to make this worse.

On the other hand, this could be part of some new reality program. In which case, you got me!
 
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outrun
Posts: 4573
Joined: January 1st, 1970, 12:00 am

Re: exercise vs sell of an asset

March 10th, 2017, 9:16 pm

I'm also going to stop list1, ..it's clearly not working or paying off. If we continue, frustration will escalate and things might get needless negative.
 
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list1
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Posts: 827
Joined: July 22nd, 2015, 2:12 pm

Re: exercise vs sell of an asset

March 10th, 2017, 10:59 pm

List1, can you -just like me- also see other people besides me on this forum? Can you see Paul's post?
I read  a few times Paul's questions and did not quite understand them and its connection to primary line of discussion.
The primary line of discussion is "what is the difference between selling and exercising an option".

Why don't you understand Paul's questions? Is it because you don't know wat "exercise" means? I've also asked this many times: "what happens when you excersise a call?".
If you don't know the answer you can Google "exercise an option", read it, and then answer the question.
My concern was  to the rule to specify the moment when option should be sell or exercise if the moment  coincides with maturity. My point speaking broadly is the moment when 'adjusted' rate of return on option is maximum. That is why in particular that the problem is related to buyer only and seller of the option does not involved. To calculate rate of return we need option premium at initiation C ( 0 , S ( 0 ) ) as well the value of the contract at the final moment. It does not matter whether final moment is prior to maturity or maturity itself as value of the contract is uniquely defined. The call price at t , [$] C ( t , S ( t , ]\omega )) , t  \le T [$] is what should be used to calculate random rate of return. We should specify random time which actually not Markov stopping time that presents maximum 
[$] \frac { C ( t , S ( t ) ) - C ( 0 , S ( 0 ))} { C ( 0 , S ( 0 ))} [$]                  (1)
Discussion turned to the what is the difference between the option price prior to maturity and exercise price. For representation of the rate of return (1) it is not a problem. It is [$] C ( t , S ( t ,\omega )) , \, t  \le T \,  or \,[ S ( T ) - K ] \chi ( S ( T ) > K ) [$].
 
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list1
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Posts: 827
Joined: July 22nd, 2015, 2:12 pm

Re: exercise vs sell of an asset

March 10th, 2017, 11:14 pm

Your broker calls you to say your option has just expired. You have no access to market information. You have a pencil and paper. Your broker asks you what you want to do. Do you:

1. Tell him to exercise the option
2. Ask him to wait while you do a calculation of return
3. Say you want to wait for days, perhaps weeks, to see what the stock does
4. Ask for further information

____________________________________________________________________________________________________________________________

When broker call to say that my option is expired he does not need my advice at all. If at expiration S ( T ) > K he should  exercise.. It is better than not exercise it. 
At any moment prior maturity owner of the option should have estimate whether exercise option or it makes sense to hold it. As the moment of the maximum return does not Markov moment we could not resolve the problem dealing with diffusion processes as underlings. Hence it makes sense to make a reduction of the approach. For each barrier L the moment at which underlying hit the level L is Markovian. Theoretically it is possible to estimate probability 
[$] P ( max_{ u \in [ t , T ] } \, S ( u ) > L ) [$] 
such and other relevant information is needed in order to make a decision sell option or hold it at the moment t < T.