Are underlying assets supposed to be sold/bought immediately after being bought/sold in call/put option?
In the first case, if you wish to own the stock, you just exercise the option, and buy it for the strike price. Else, you can sell the option just before expiration, it will be priced very close to its in-the-money value. When you can exercie your option depends on your trading style. In the american options trading style (the most popular) you're allowed to exercice your options and make profit (if any) whenever you want before the expiration date. Thus, the decision of  exercising your option and make a profit out of it does not rely only on the asset price. The reason is, you already paid for the premium to get the option. So, if taken into account the underlying price AND your premium, your investment is profitable then you can exercice your contract anytime. No, if you are trading options to profit solely off the option and not own the underlying, you should trade it away because it costs more to exercise:
According to this article: With an all-stock merger, the number of shares covered by a call option is changed to adjust for the value of the buyout. The options on the bought-out company will change to options on the buyer stock at the same strike price, but for a different number of shares. Normally, one option is for 100 shares of the underlying stock. For example, company A buys company B, exchanging 1/2 share of A for each share of B. Options purchased on company B stock would change to options on company A, with 50 shares of stock delivered if the option is exercised.  This outcome strongly suggests that, in general, holders of options should cash out once the takeover is announced, before the transactions takes place.  Since the acquiring company will typically offer a significant premium, this will offer an opportunity for instant profits for call option holders while at the same time being a big negative for put option holders.  However, it is possible in some cases where the nominal price of the two companies favours the SML company (ie. the share prices of SML is lower than that of BIG), the holder of a call option may wish to hold onto their options. (And, possibly, conversely for put option holders.) I had a coworker whose stock picking skills were clearly in the 1% level. I had a few hundred shares of EMC, bought at $10. When my coworker bought at $80, I quietly sold as it spiked to $100. It then crashed, as did many high tech stocks, and my friend sold his shares close to the $4 bottom advising that the company would go under. So I backed up the truck at $5, which for me, at the time, meant 1000 shares. This was one of nearly 50 trades I made over a good 10 year period. He was loud enough to hear throughout the office, and his trades, whether buy or sell, were 100% wrong.  Individual stocks are very tough, as other posters have offered. That, combined with taking advice from those who probably had no business giving it.  For the record, I am semi-retired. Not from stock picks, but from budgeting 20% of income to savings, and being indexed (S&P) with 90% of the funds.  If there are options on your stock, you might sell calls for a few years, but that's a long term prospect. I'd sell and take my losses. Lesson learned. I hope. "Whether or not you make money here depends on whether you are buying or selling the option when you open your position.  You certainly would not make money in the scenario where you are buying options at the open.  If fact you would end up loosing quite a lot of money. You do not specify whether you are buying or selling the options, so let's assume that you are buying both the call and the put.  We'll look a profitable trade at the bottom of my answer. Buying an in-the-money Call option with a strike price of $90 when the underlying asset price is $150 would cost you a small fraction over $6000 = (100 x $60) since the intrinsic value value of the option is $60.  Add to this cost any commission charged by your broker. Buying an out-of-the-money Put option with a strike price of $110 when the underlying asset price is $150 would cost you a ""small"" premium - lets say a premium of something like $0.50.  The option has no intrinsic value, only time value and a volatility value, so the exact cost would depend on the time to expiry and the implied volatility of the underlying asset. Since the strike price is ""well out of the money"", being about 27% below the underlying asset price, the premium would be small.  So, assuming the premium of $0.50, you would pay $50 for the option plus any commission applicable. The cash settlement on expiry, with an underlying settlement price of $100, would be a premium of $10 for each of the two options, so you would receive cash of 100 x ($10 + $10) = $2000, less any commission applicable.  However, you have paid $6000 + $50 to purchase the options, so you realise a net loss of $6050 - $2000 = $4050 plus any commissions applicable. Thus, you would make a profit on the put option, but you would realise a very large loss on the call option. On the other hand, if you open your position by selling the call option and buying the put option, then you would make money. For the sale of the call option you would receive about $6000.  For the purchase of the put option you would pay about $50. On settlement, you would pay $1000 to buy back the call option and you would receive about $1000 when selling the put option. Thus you net profit would be about ($6000 - $1000) for the call position, and ($1000 - $50) for the put position.  The net profit would then total $5950 less an commissions payable." Option prices consist of two parts: the intrinsic value (the difference between the strike and the current price of the stock) and a time premium, representing the probability that the stock will end up above the strike for a call (or below for a put).   All else being equal, options decline in value as time passes, since there is less uncertainty about the expected value of the stock at expiration and thus the time premium is smaller.  Theta is the measure of the change in value in one day.  So for every day that passes, the calls you sold are going down by $64.71 (which is positive to you since you sold them at a higher value) and the calls you sold are going down by $49.04. So your position (a short spread) is gaining $15.67 each day (assuming no change in stock price or volatility). In reality, the stock price and volatility also change every day, and those are much stronger drivers of the value of your options.  In your case, however, the options are deep out of the money, meaning it's very likely that they'll expire worthless, so all you have left is time premium, which is decaying as time goes on. Really all you need to know is that American style can be exercised at any point, European options cannot be exercised early. Read on if you want more detail.  The American style Call is worth more because it can be exercised at any point. And when the company pays a dividend, and your option is in the money, if the extrinsic value is worth less than the dividend you can be exercised early. This is not the case for a European call. You cannot be exercised until expiration. I trade a lot of options, you wont be exercised early unless the dividend scenario I mentioned happens. Or unless the extrinsic value is nothing, but even then, unless the investor really wants that position, he is more likely to just sell the call for an equivalent gain on 100 shares of stock. "If your shares get called on stock at a price below what you paid for the stock, your gain or loss depends on what premium you got for the options you sold.  ""can I deliver shares at that assigned strike using margin or additional capital if I have it? Can the broker just take care of it and let me collect the time premium? "" You don't need margin or any cash because you already hold the shares. A covered call means your cash requirements are 'covered'. So they'll just buy your shares at the strike price of $50. And you still get to keep the premium (which you should have gotten when you sold the covered call).  You only need cash or margin when you've sold an uncovered call or put." The time value decay is theoretically constant.  In reality, it is driven by supply and demand, just like everything else in the market.   For instance, if a big earnings announcement is coming out after the close for the day, you may see little or no time decay in the price of the options during the day before. Also, while in theory options have a set value as related to the trading price of the underlying security, that does not mean there will always be a buyer willing to pay a premium as they come close to expiration (in the last few minutes). You can't forget to account for the transaction fees associated with buying the options, or the risk factor involved.   It is rare, but there are times I've actually had to sell in the money calls at a penny or two LESS than they're actually worth at the time just to unload them in the last few minutes before the market closed on expiration day. I cannot explain how the derivative is created in specific, because I have never actually built one. However, [Investopedia](http://www.investopedia.com/terms/m/mitts.asp#axzz1wwZTADu5) suggests to me that the concept is quite simple. They are selling a synthetic protective put.   An individual could quite easily remake the payout structure of these securities -  1. Buy the share or index in which you are interested 2. Buy a put option on the same asset with a strike price as your purchase price 3. If you are interested in the target-term aspect, you ought to buy European puts. American options will be more expensive, but give you more flexibility to sell your share. 4. At the maturity of your option, if the share is below the price you paid you can exercise your option and still have your principal. If it is above, leave your option alone and sell your share for profit.