How the option is exercised

The key things to know about managing options, including exercise, assignment, and roll.

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Essentially, there are 4 things you can do if you own options: hold them, exercise them, roll the contract, or let them expire. If you sell options, you can also be assigned. Suppose how the option is exercised own call options which grant the right, but not the obligation, to buy a specified amount of an underlying stock at a specified strike price up and until a specified expiration date and you believe the underlying stock price will rise within the time remaining until expiration.

In this scenario, you would hold the option so that they increase in value over time.

Should an Investor Hold or Exercise an Option?

Exercising your options To exercise an option means to take action on the right to buy or sell the underlying position in an options contract at the predetermined strike price, at or before expiration. The order to exercise your options depends on the position you have. For example, if you bought to open call options, you would exercise the same call options by contacting your brokerage company and giving your instructions to exercise the call options to buy the underlying stock at the strike price.

There are a variety of reasons why you might choose to exercise options before they expire assuming they are in the money, which means they have value.

In addition to wanting to capture realized gains on your options, you may want to exercise: To get the dividend. At or before expiration to own the stock. If you are bullish and you own calls on the underlying stock, you may want to exercise the options contract to own the stock immediately. You might use options to offset losses from an existing position.

Article Reviewed on July 30, Michael J Boyle Updated July 30, As you learn about trading optionsyou'll find that options traders use terms that are unique to options markets. You'll see these terms appear often and understanding them can have a significant effect on your chances for profitability on an options trade. Defining Options Before getting into options terminology, it's helpful to get some background on options themselves. Just like stocks and bonds, options are securities that trade on an exchange. They fall into a category called derivative securities, because they're derived from or linked to another security, and the option's price is dependent on the price changes of this security.

You might exercise the put options which would result in delivery of the underlying shares to capture those gains to help offset the unrealized loss for the stock you already own.

There are additional choices you can make when exercising how the option is exercised stock plan options. You should consult your tax advisor if you have additional questions.

How Does Options Exercise & Assignment Work?

Rolling your options Before expiration—and, more commonly, near the end of the contract—you can also choose to roll the contract. This involves closing out your existing options position by selling to close a long position or buying to close a short position that is about to expire and simultaneously purchasing a substantially similar options position, only with a later expiration date.

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You might want to roll out your position if you want to have the same options exposure after your contract is set to expire. In a covered call position, for example, you can also roll up, roll down, or roll out. This involves closing out your existing short options position that is about to expire, and simultaneously selling another options position, typically with a later expiration date.

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While there are differences among these choices, the objective is the same: to obtain similar exposure to an existing position. Assignment If you sell an option, you have an obligation to sell stock if you are short a call, and an obligation to buy stock if you are short a put. The owner of call or put options has the right to assign the contract to the seller.

How Is a Put Option Exercised?

This is known as assignment. Assignment occurs when the buyer exercises an options contract on or before expiration, and the seller must fulfill the obligation by either buying or selling the underlying security at the exercise price. As a seller of options, you can be assigned at any time prior to expiration regardless of the underlying share price—meaning you might have to receive or deliver shares of the underlying stock.

Depending on your position, settlement can occur in a variety of ways.

Exercising Stock Options

If you are assigned on a covered call, for example, the shares you own will be sold automatically. Let the options expire Remember, options have an expiration date.

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  • How Is a Put Option Exercised?
  • Exercise and Assignment When a stock option is exercised, the call holder buys the stock, and the put holder sells stock.
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  • What it Means to Exercise an Option?

They either have intrinsic value for calls, the stock is above the strike price, and for puts, the stock is below the strike price or they will expire worthless. If the options have intrinsic value, you should plan to exercise at or before expiration, or anticipate having it automatically exercised at expiration if in the money.

If they do not have intrinsic value, you can simply let your options expire.

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Of course, letting options expire can also have tax consequences. Next steps to consider.