I recently got into options, and I'm a bit confused on how to exercise my contracts.
I have an in the money contract. I understant that if I sell to close, I sell the contract at its current price, but what if I want to buy 100 shares at the strike price. What order type is that ? That is after all the intended purpose of options, right ?
These are the Order Types that I can place with my broker:
Thanks,
Liam
If you have an in-the-money option, then most likely the option is worth more than the difference between the strike and current price.
In that case, it makes more sense to "sell to close" the option and to buy the stock at the current market price. You'll have more profit left over from the premium received than what you "lose" by buying at market versus the strike price.
For example, say the stock is currently at $110 and you hold a call option with a strike of $100, that is currently worth $12. If you exercise the option, you buy the stock at $100 and have an instant paper gain of $10 per share, minus what you initially paid for the option.
If instead you sell the option and buy the stock at $110, you still have a stock that's worth 110 but have $12 per share in cash, for a gain of $12.
The only significant difference might be tax, since you'd have to pay tax this year on any gain from the sale of the option ($12 less what you paid for it), versus deferring the gain on the stock until you sold it, with a cost basis of $100 plus what you paid for the option. Unless you got the option extremely cheaply and the current tax is significant, it's probably not worth foregoing the profit just to defer the tax.
Your broker should offer some web site menu feature that when selected, it exercises a long contract. If not, you may have to call them to do so.
The intended purpose of options isn't necessarily to acquire long or short positions in the underlying. Their purpose is to make money from them or to avoid loss on something else (hedging). Exercising them is not mandatory or always desirable.
Buying 100 shares for 100x the strike price is what exercising is; it is not an order type. Google "how to exercise options" plus the broker's name if you don't know where in the ui it is; probably a menu option on the portfolio row.
Note that options have time value. Unless it is close to expiration or to a dividend, you will likely wind up with more money by selling the option to close and buying 100 shares at the underlying's current market price, than by exercising the option. Just being in the money and wanting to trade the option for the shares isn't a reason to exercise.
