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be exercised at the expiration date. The best time to exercise i.e. buy underlying stocks if it is a call option or sell underlying stocks if it is a put is when the perceived value to the trader is highest. Since prices fluctuate frequently, there is no sure way to know exactly when the best time to exercise is. For this reason it is good to have a pre-determined expectation and trading strategy in mind as it can make the options experience more palatable.

Trading Strategy:

Developing a trading strategy for options may take some time. Since these contracts are leveraged through credit it can be considered betting using borrowed money. For this reason a new trader of options might be advised to follow a few precautionary steps as follows:

1- Only borrow within your financial means.
2- Familiarize thoroughly with the trading process and financial instrument.
3- Use a reliable broker that is trustworthy and has a good reputation.
4- Consult family or friends if the money to be used is shared.
5- Develop a trading strategy or method.

Options trading is a sophisticated form of exchanging property through derivative calculations and means. While the potential to make money using options is higher than with non-derivative securities the risk can also be higher. Options contracts are bought from brokerage firms with expirations within 30 day increments and are bought with prices calculated in terms of the underlying security. The resulting contract prices therefore become either in the money, out of the money or at the money. Exercising options is not an exact science and is often done using trading strategies.

Sources:

Zvi Bodie, Alex Kane and Alan J. Marcus. 'Investments' New York. 2002 McGraw-Hill Irwin. p.662-670.
http://www.888option s.com/basics/options_pricing.j sp
http://www.investopedia.com/ ask/answers/05/buyingoptions.a sp
http://en.wikipedia.org/wiki /Exercise_(options)

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