The right to buy or sell shares of the underlying stock at a specific price is called the strike price when you buy options.The action you bought the right to do will be completed when you exercise the option.European-style options can only be exercised on their expiration date, whereas American options are able to be done at any time.You can make money with options by selling them or offsetting them with other options.The risks of options trading are considerable.If you are a beginning investor, be careful.
Step 1: The price of the underlying stock is related to the strike price.
When you exercise your option, you buy or sell the underlying stock at the price stated in the contract.You are in the money if your options are worth more than the stock price.You can buy stock at the strike price with a call option.You can buy shares at your lower strike price if the stock is trading at a higher price than your stock price.You could turn around and sell those shares at a profit.You can sell stock at the strike price listed on your contract if you have put options.If the stock is selling at a much lower price on the open market, you will make money if you exercise your options.Someone is forced to buy shares at a higher price.You can either pocket the difference or buy more shares at the lower price.If you own a call option for stock at the strike price of $50, and the stock is currently selling for $100, you are in the money because you can buy it for half the price it's actually trading for.If you owned put options for stock at the strike price of $100, and it is currently selling at $50, you are in the money because you can force someone to buy it at twice the price it's currently trading for.
Step 2: The time value of your option should be evaluated.
You don't have to wait until the option's expiration date to exercise it, if you have American-style options.Losing potential value is a consequence of exercising an option before the expiration date.The risk is that the stock price won't move as you've predicted.Suppose you have money on call options that don't expire for 6 months.You can buy the stock at your strike price now.If the stock continues to rise, you could potentially make more money by exercising the option later.Most options aren't exercised until close to their expiration date, even with American-style options.Options holders can maximize the time value of their options.
Step 3: Check your account balance.
You have to own the underlying stock to exercise a put option.You need the resources to purchase the underlying stock at the strike price if you're exercising a call option.Your broker may have rules about how much money you need to have in your account to exercise your options.Call customer service or check the educational resources on the broker's website for specific rules.
Step 4: Your broker should exercise the option.
It's not possible to trade options without a broker.If you have an online broker, you don't have to do anything more than click a button.Your broker will take a number of steps to exercise your options.It takes a few minutes to complete the process.You don't have a relationship with the investor who assigned the options you exercise.You won't know who they are.The process is done electronically.
Step 5: Make sure the net result is true.
Your broker will deposit your profits into your account after your options have been exercised.A cash deposit is required for a put option.You will have shares in the underlying stock for the call option.Fees and commission will be deducted from your account.If you exercised a call option, the commission and fees will come from the cash in your account, not the shares of stock you purchased through your options contracts.
Step 6: Evaluate the risk in the options position.
offsetting options can reduce the risk of trading options.You may reduce your opportunity to profit from your position if you minimize risk.Suppose you own put options with a strike price of $50.You are out of money because the stock is selling for $100.If they're available, you could buy call options with a strike price of $50.While you would lose money on the put options, you'd make up the difference with the call options.
Step 7: Find premiums, commissions, and fees.
When you buy additional options, you'll have to pay a fee to your broker and a premium to the seller.If you don't own the stock on which your options contracts are based, offsetting the options can cost you less in commissions and fees than if you exercised the option or sold the contracts themselves.Depending on your broker, the commission and fees are usually standard.Some brokers charge per-contract fees, plus commission, while others charge a flat fee for each transaction, regardless of how many options contracts you buy.Premiums may increase if the underlying stock is considered particularly volatile.They are quoted on a per-share basis.If you want to buy 3 contracts, you would have to pay $75 in premiums.
Step 8: Pick a series that matches your choices.
If you want to close your position completely, you have to purchase options with the same strike price and expiration date as the options you currently hold.The options will not close out your position if they don't match exactly.Suppose you have 3 put options contracts with an expiration date of January 1 and a strike price of $50.3 call options contracts that have a strike price of $50 can be used to offset those contracts.Call options have more time value than put options if they expire on January 15.
Step 9: You should purchase opposing options to close your position.
You would need to buy put options of the same underlying stock if you have call options.If you have an online broker, all you need to do is find the correct series and click a button to purchase opposing options.Make sure you buy the same number of contracts for the opposing position as you did for your original position.If you own 5 put options contracts with a strike price of $50 that are due to expire on January 1, you would need to buy 5 call options with the same price on the underlying stock.
Step 10: Evaluate the cost for exercising the option.
It is better to sell your option than to exercise it.If you have to first buy the underlying stock, you may need to pay additional fees.If you have a put option, you need to own the underlying stock before you can sell it at your strike price.When you exercise your option, you will typically pay additional commissions and fees.If you have a call option, you don't have to buy the stock before.If you sell the contracts yourself, your broker's fees may be lower than if you exercise the options.
Step 11: The option's potential is analyzed.
The basic value of an option can be calculated by comparing the strike price to the stock price.The quality of the underlying stock and its performance can affect the value of an option to another investor.Market conditions may affect the value of your options, as well as the general performance of the underlying stock and the supply and demand for shares.You should be familiar with the stock market and understand the performance trends in the sector of the underlying stock to perform this level of analysis.If you need help with the decision to sell your options, you may be able to get assistance from your broker.
Step 12: Tell your broker to sell your contracts.
You can sell your options contracts with the click of a button if you have an online broker.You can sell the contracts yourself if you don't own the underlying stock.You can take advantage of external factors, such as demand for the underlying stock, when you sell your options contracts on an exchange.Before you sell your contracts, talk to your broker about any questions you have about pricing.
Step 13: Take a look at the account balance.
If you sell your options, your profit will be deposited into your trading account without any fees.This is a cash transaction since no stock was traded.