Exercising a call option

Author: RomaRiO19 Date of post: 25.05.2017

The average individual investor should probably never exercise an option. There are a couple of exceptions, but if you are someone who buys options, these probably do not apply to you.

I recommend selling the options any time you want to exit the trade. Most brokers charge a relatively high fee to exercise.

exercising a call option

If you then sell the shares you just bought, you must pay another commission. What was the point of exercising? Just sell the option.

When you exercise a call option, you take possession of the shares. That means you must pay for the shares, using cash. In either case, you pay interest to use cash.

Current interest rates are low, but they will not always be low. This is a waste of money. This is a real danger when you exercise an option prior to expiration, and is something that many investors fail to recognize. If you own a call option and the stock plunges, your loss is limited to the value of the option. But, if you converted your calls to stock, your loss becomes essentially unlimited when the stock declines rapidly.

Some investors exercise the options when expiration arrives, planning on unloading the shares when the market opens the following Monday.

How to Decide Whether to Exercise a Call Option | Finance - Zacks

This involves an unnecessary risk. Why take that chance? Sure, the price may be higher and you reap an extra profit. Just sell your calls before the market closes Friday. Each of the problems listed above occurs when you exercise an option.

4 Reasons To Hold Onto An Option

It may pay to accept those costs or risk, if there were something to gain. But exercising the stock and holding it gives you all the risks of a stockholder, with no benefits. If you want to maintain a long position in the same stock, sell your old option and buy another option with a later expiration date. Further Reading, Options Trading: Getting Started Market Recaps Education Online Brokers ETFs Trade Journal. Join Over 22, Investors Receive Weekly Market Recaps directly in your email inbox!

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Call Options Strategy - Should You Ever Exercise A Call Option Early?

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