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On the Robinhood website, https://support.robinhood.com/hc/en-us/articles/360001331403, the following is written about exercising stock options:

Can I exercise my call before expiration?

Yes. However, it’s generally more advantageous to sell your option back to the market rather than early exercise. If you wish to early exercise, you can email our customer support team.

It seems to me that from a tax perspective, it would actually be more advantageous to exercise the option and hold the stock for over a year so that your gains are taxed as long-term capital gains. Is the fact that it is cumbersome to do this not a major disadvantage of options trading on Robinhood? Perhaps I should trade options on Interactive Brokers instead?

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    It might, but if you plan to hold the stock for over a year, what's the reason to buy call option instead of stock itself?
    – user67084
    Jul 1, 2019 at 4:48
  • Suppose you buy 100 options with a strike price of $15 and the stock goes up to $20. If you sell the options within a year you earn $500 on which you pay, say, 24% * $500 = $120 tax. However, if you exercise the options and hold them for a year, assuming the price doesn't go up further, you'd pay 15% * $500 = $75 in long-term capital gains taxes. So basically you earn 9% more if you on the 'options part' of the gain if you exercise the option and hold it for a year.
    – Kurt Peek
    Jul 1, 2019 at 5:08
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    My guess is there are people who will speculatively buy an option, and convert it to stock if things look good, but my impression from PF&M is that the majority of people either trade options/etc. over a relatively short term, or buy stocks for the longer term. The former never/rarely exercise; the latter would tend to just buy the stock @ $15. And, of course, if you do exercise and hold for a year, there's a chance the stock drops to $10.
    – TripeHound
    Jul 1, 2019 at 7:07
  • @gamma - One can buy a call LEAP if one wants to hold for over a year. It costs less than the stock and has less risk. One can use a high delta call LEAP as a surrogate for the stock (often called a Stock Replacement strategy). Similar profit (lower by the amount of time premium and dividends received by shareholder).
    – Bob Baerker
    Jul 1, 2019 at 15:12
  • @Kurt Peek - Your terminology needs some cleaning up. A standard option covers 100 shares. If you buy one call with a strike price of $15 and the stock goes up to $20, you have a $500 gain less the cost of the call.
    – Bob Baerker
    Jul 1, 2019 at 15:12

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If an option is one cent or more in-the-money at expiration, the Option Clearing Corp (OCC) automatically exercises your options whether they are long or short. This is called Exercise by Exception. Small detail but Robinhood is taking credit for what the OCC does and also mischaracterizes it:

If your stock is above or near the strike price at expiration (call), we’ll automatically exercise or sell it for you, so you don’t need to worry about checking the app.

So if your call is ITM at expiration, you don't have to do anything. You'll own the stock after auto exercise.

If a long option has time premium remaining, it makes more sense to sell it rather than to exercise it. However, ITM calls often trade below parity (the bid is less than the intrinsic value) if expiration is near and/or there's a pending dividend. If that's the case, you'll take a haircut by selling it. If your intention is to close the position for maximum gain or minimum loss (no share ownership), in the case of a long call, short the stock first and then exercise the call, assuming you have approval as well as the margin to support the trade. That locks in the intrinsic value and avoids the haircut.

As for trading options on Interactive Brokers instead of Robinhood, that's a function of what your needs are. Robinhood offers a stripped down platform and its only advantage is no commissions. It has many disadvantages.

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  • Every Friday 12 noon time is when Robinhood dumps their customer options that are about to expire in 1 hour - often below prices that they should trade at. Do you know if Robinhood and/or their affiliates place those bids (and take profits) or is it genuine open market dump done by Robinhood?
    – user4910112
    Dec 20, 2019 at 20:40
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    I have no clue what Robinhood does nor do I understand how they can dump their customer options (whatever that entails). If an option expires at 4 PM, they have no right to do anything before that unless there is an account or margin violation. Now that many of the major discount brokers have eliminated commissions, I have no clue why anyone would do business with Robinhood. From everything that I have read, Robinhood is a Mickey Mouse operation
    – Bob Baerker
    Dec 20, 2019 at 20:54

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