How To Exercise An Option?
Exercising an option is as easy as clicking a button or a link in your trading interface if you are using an online options trading broker. Clicking that button informs your broker of your intention to exercise an option which then sets off a complex series of actions that we will be covering in a later section below. When you exercise a call option, you will buy the underlying stock at the strike price of the call option. For instance, if you exercise 1 contract of a $40 strike price call option, you would buy 100 shares of the underlying stock at $40 no matter what price it is at the time of exercise. This price is known as the "Exercise Price". When you exercise a put option, you will sell your shares at the strike price of the put options. For instance, if you exercise 1 contract of $40 strike price put option, you would be selling 100 shares of the underlying stock at $40 no matter what price it is at the time of exercise. If you do not have the underlying stock, you will end up with a short stock position. That's right, you cannot exercise an option unless you are the holder of a long position. If you are short an options contract, you cannot exercise the option.
Please take note that only American Style Options can be exercised before expiration. European Style Options do not offer such flexibility. Most exchange traded options all over the world are American Style Options. All publicly traded equities options in the US market are American Style Options as well. Some index options such as the Nasdaq 100 Index Options are European style options.