Deciding When to Sell or Exercise NKLA Put Options

Understanding Put Options on NKLA

For first-time investors navigating the world of options trading, evaluating when to exercise or sell a put option can seem daunting. In this article, we explore the strategic considerations of handling a specific put option contract for Nikola Corporation (NKLA), with a strike price of $5 and an expiration date on November 1st.

The Current Option Scenario

As of October 20th, the current stock price of NKLA is $3.82, which places the option in-the-money (ITM). Here is a breakdown of the essential option metrics:

Option Metric	Value
Strike Price	$5.00
Current Stock Price	$3.82
Bid	$1.26
Mid	$1.45
Ask	$1.63
Break-even Price	$4.20

With the stock trading below your strike price, you have a valuable option on your hands. However, the question remains: should you sell to close or exercise the option?

Sell to Close vs. Exercise

Selling to Close

When you choose to sell the option to close, you are effectively exiting the position by selling your option to another buyer. Here's why this might be beneficial:

• Extrinsic Value Capture: Selling allows you to capture both intrinsic and extrinsic value, which includes time value and volatility.
• Transaction Simplicity: Generally, selling options can be simpler and less costly in terms of transaction fees compared to exercising.
• Immediate Gains: Lock in profits without needing to involve the underlying stock.

Exercising the Option

Exercising the option means buying the underlying stock at the strike price and may be considered if:

• Long-Term Stock Outlook: You anticipate the stock’s value to increase further and wish to hold shares.
• Liquidity: Possession of the stock grants more flexibility in the market.

Strategic Considerations

1. Market Conditions: If you believe NKLA's price may fall further, holding the option may capture more intrinsic value.

   • Example: If the price drops to $3.50, exercising or selling later could yield higher intrinsic profits.

2. Risk Tolerance: Conservative investors might opt for selling as soon as ITM to minimize risk.

3. Cost Analysis: Always consider the detailed cost implications of executing versus selling.

In summary, both strategies have merit depending on personal investment goals, market insight, and risk management capabilities.

Key Terms Explained

Put Option: A contract granting the holder the right, but not the obligation, to sell a specific amount of an underlying asset at a set price within a specified time.

In-the-Money (ITM): A situation where an option has intrinsic value, implying a put falls ITM when stock prices drop below the strike price.

Strike Price: The set price at which the option holder can sell the underlying asset.

Intrinsic Value: The difference between the underlying asset's current price and the strike price. For puts, it equates to the strike price minus the stock price.

Extrinsic Value: The component of the option's price that exceeds its current intrinsic value, often driven by time until expiration and implied volatility.

By journaling these considerations within your trading journal, investors can maximize perspective and strategy, aligning each option contract with their broader financial goals. Visit WealthBee to leverage our data analysis tools and improve your trading journaling practices.