Been trading for a while now but still confused about this term. Keep seeing people talk about exercising options but not sure what actually happens when you do it.
Does it mean you have to buy the actual stocks? Or is there another way to handle it when the option expires?
Lost $800 on my first option because I didn’t get this basic concept.
When you exercise, you’re converting your option into actual shares. But here’s the kicker - you need enough cash to buy those 100 shares per contract.
Most people just sell the option for profit instead. Way less hassle.
Think of it like a coupon that lets you buy shares at a fixed price. Exercising means you actually use that coupon and buy the shares.
Most traders don’t exercise though. They just sell the option contract when it’s profitable. Way simpler and you don’t need thousands in cash sitting around to buy the underlying shares.
This video breaks down the whole process:
I’d only consider exercising if I really wanted to hold the stock long term and the option had no time value left.
Two actions when options expire:
• Exercise - acquire 100 shares per contract at strike price
• Cash out - realize profit difference
Check broker rules on automatic exercise.
Exercising an option means you’re actually buying or selling the stock at the strike price. For example, if you have a call option with a $50 strike and the stock is trading at $60, you would purchase 100 shares at $50 each.
However, many traders prefer to sell the option contract before it expires. This approach is easier and doesn’t require as much cash. Exercising options is usually reserved for those who want to own the shares or find a lack of liquidity in the options market.
Most simply sell the option. Exercising is only for long-term holds.