Exercising an Option for Cash
Main Problem:
- The user is confused about the process and implications of exercising an option for cash versus shares, including the required buying power and how profits are realized.
Solutions Discussed:
- It is recommended to have sufficient margin or cash equity to support the exercise of long options contracts, with the option to deposit funds until the settlement day.
- The profit from exercising the option depends on the market price when the shares are sold, not just the strike price.
- When exercising a call option, the cost of the call adds to the cost basis of the stock purchased.
- Confirmation of exercised options can be found in the “Activity & Orders” section of the Fidelity account, though it may take some time to reflect.
- Exercising a call will result in receiving shares, not cash directly, and the user can sell the shares later if they desire.
Here’s the full thread
I recently exercised an option for shares. The agent on the phone mentioned I could also exercise the option for cash. I had a few questions about what that entailed. Here’s a hypothetical situation so I can ask more specific and directed questions:
It’s Friday and I have a $10 strike call on a stock with a price of $10.01. I currently have $990 in buying power.
Would I need to get to $1,000 buying power to exercise this option for cash? If so, do I need $1,000 buying power or $1,000 settled cash?
If the stock’s price closed at $10.01 and I exercised my option, would I be guaranteed the $0.01 x 100 profit? Or could the opening price on Monday change how much I make? For example, if the stock opened at $9.90 would I lose $0.10 x 100?
Also, how will exercising an option change my cost basis on the stock?
I think that’s all my questions for now. Thank you for your time!
Oh, another one: How can I see that I exercised my call? The agent on the phone confirmed it on the phone, but I can’t seem to see anything on my account to confirm it.
Thanks for stopping by, @Dew.
First, let’s touch on your hypothetical scenario. It is recommended, though not required, to have either the margin or cash equity to support any exercise of long options contracts. If there are not sufficient funds in the account, you generally have until the settlement day to deposit funds to pay for the shares purchased as a result of the exercise of the call contract. If funds are not deposited, Fidelity may liquidate the position, which can potentially result in a trading violation.
Keep in mind that since you’re essentially purchasing the shares at the strike price of $10, you’ll guarantee the purchase amount of $1,000, but the profit will all depend on if you decide to sell the newly purchased shares at the market at a later date.
As for cost basis, when a call option is exercised, the holder (buyer or owner) adds the cost of the call to their basis in the stock purchased. Additionally, viewing your exercised option should be available in your “Activity & Orders” section of Fidelity.com. However, this could take a little time to show properly within the account.
If you have any further questions. Don’t hesitate to reach out!
> Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Before trading options, please read the Characteristics and Risks of Standardized Options. Supporting documentation for any claims, if applicable, will be furnished upon request.
So it sounds like you get shares and you have to sell them yourself?
Or can I somehow get cash directly from exercising the options?
And thank you for your answer!
Correct. When you exercise a call, you will receive the shares and can sell them at a later time, if desired. If exercising a call, you would receive shares, not cash.