Today we’re going to look at how to exercise a call option. We are going to look at the actual process of exercising a call option, why a trader would exercise, and what happens afterwards.
Let’s look at the process of exercising a call option.
When you buy a call option for a share, you can “exerciseYou always have the right to own the option.
“Exercise” means that you have the right to buy the stock.
The person who sold the call to you is “obliged” to fulfill the terms of the option contract to sell the stock.
Trading is pretty easy to set up.
The OCC, the Options Clearing Corporation, controls all exercises and assignments after the trades are completed.
Example: Suppose you buy an XYZ call option for June 50th.
The share price rises to $ 55 per share and you decide to exercise your right to buy the stock at a profit. You instruct your broker to do this.
The broker notifies his administrative staff to exercise and buy the stock.
The order is then sent to the OCC: exercise of a contract from the series of calls from June 50th.
The OCC will randomly select a company that did not complete the June 50 XYZ call.
The company must deliver 100 shares of XYZ to the company that exercised the option at a price of $ 50 per share. The company contacted the customer of their commitment.
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The selection process is:
- First-in / first-out basis or
The OCC and the customer exercising the option usually do not care how the delivery method is carried out.
You want to make sure that 100 shares of XYZ ship at a cost of $ 50.
The holder who made the call can keep the stock in their account if they wish, but must pay cash or fully margin them.
Or the owner may want to sell it on the open market at a price greater than $ 50.
If the holder has a margin account, it can be sold immediately.
If the holder is training on a cash account, the inventory must be paid in full; even if sold that day. Check with your broker.
There are a few reasons you might be exercising your option:
- Own the stock. If you are bullish and have calls on the underlying stock, you may want to exercise the options contract to own the stock. Most likely the stock price has risen and you can make a profit.
- To get the dividend. The fair value may be less than the dividend payable to the owner of the underlying security.
- To offset a short / long position. You can use options to offset losses from an existing position.
Note: Fees and commissions will be charged, and closing an option position will trigger a taxable event. Therefore, consider the tax implications.
Disclaimer: The information above applies to For educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are unfamiliar with exchange-traded options. All readers interested in this strategy should do their own research and seek advice from a licensed financial advisor.