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As I understand it, exercising an option does not happen immediately. You send in the instructions to exercise and it gets done at market close for that day. What if, in between the moment you send in the order to exercise and the market close, the underlying security's price goes against your reasons for exercising?

Are there straightforward ways to lock in the profit from an option's exercise?

  • What country ? I have limited knowledge on 'long' position side as I do sell options. But the moment I have exercised a few long call options, the shares are there immediately. Can you tell which brokerage ? and if you are referring to Long Call or long put ? – riya Aug 1 at 13:51
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Are there straightforward ways to lock in the profit from an option's exercise?

Yes, by selling the option at a profit without exercising it.

  • That's one way but it avoids the exercise. I'm more interested in understanding techniques that apply in the context of exercising the option. – liviur Aug 1 at 7:21
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    @liviur if you send instructions to exercise and you are out the money then you get shares as a loss. Exercise deeper in the money to avoid that. Exercising doesn’t imply profit, so thats the flaw in your question. – CQM Aug 1 at 9:03
  • Compare the return from STC versus exercise. If there is time premium remaining in the option, unless commissions are more than the time premium, it makes more sense to STC in order to avoid throwing away the time premium. If the option is trading below parity (less than intrinsic value) then exercise makes more sense (transact in the underlying first in order to lock in price then exercise). FWIW, my broker does not permit the exercise of OTM options. – Bob Baerker Aug 1 at 11:44
  • @BobBaerker seems they don't want a simple answer, when they really need to adjust their strategy. – CQM Aug 1 at 22:40
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You have three choices with a long option:

  • sell to close
  • exercise to acquire the underlying (long or short)
  • let it expire

When you exercise the contract, the transaction is locked in and your profitability depends on whether your position has appreciated (gain not price). The terms of the contract are fulfilled at the strike price.

Exercise notices are submitted all day long and technically, it gets done after the close with overnight T+1 settlement. I can't tell you how all brokers handle it but with mine, the moment I exercise, the transaction occurs and the shares are there immediately (book entry). I can buy or sell them immediately.

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It doesn't really matter when your option is exercised. You bought a stock for price K - what the stock it worth at the time of exercise doesn't matter.

Suppose you have a call option with a strike of 100. Right now the stock is at 110 so you decide to exercise the option, which happens immediately. 10 minutes later, the stock drops to 90. You paid 100 for a stock that's worth 90 for a loss of 10.

Now instead of exercising immediately, suppose the option doesn't get exercised for 10 minutes. You still paid 100 for a stock that's worth 90 for a loss of 10. The fact that it was worth 100 is irrelevant. You're in the same place financially either way.

As others have mentioned, selling the option to close is almost always a better decision (since options have time value above the difference between the strike and underlying price).

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I think the meaning of the question is: You want to exercise a call and then immediately sell the stock so that you have no remaining exposure to it. (Normally, selling the call itself would be a better way to accomplish this, but let's say the call bid/ask is wide.) You are concerned that you cannot sell the stock immediately because the exercise is not processed until after the close.

First, as Bob Baerker notes, your broker may give you trading access to the stock immediately upon your exercise instruction. Second, even if your broker does not do this, you can (in a margin account) short the stock at any time you choose, in order to "lock in" the sale price. The long stock subsequently delivered to you will cover this short.

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To answer the question literally, although some other answers have touched on this. If you want to close out your position immediately to lock in profit from the option.

  • Exercise the option, this will not happen immediately but you will receive the stock either the next day or the day after depending on the market.
  • As you exercise the option immediately short sell the stock, equal to the number of shares will receive from the option.
  • You now have a neutral position in the stock, an equal number of long and short shares (or at least will have this when the exercise completes that night)
  • When the shares arrive from exercising the option ask your broker to cover the short using them (there is a good chance for such a short duration you will not pay any significant fees or interest for the short)
  • Some brokers have a built in feature to do this, allowing you to sell shares from an exercised option immediately before you receive them
  • Set up: you own a long call that is trading below parity (the bid is less than its intrinsic value) and you want to exercise it to avoid the haircut. If you have a margin account and if you have sufficient margin to cover a short sale of the stock, short the stock first and then exercise the call. That locks in the intrinsic value. If you do it in the reverse order, you have market risk and though it's a low probability, you could lose some of that intrinsic value. – Bob Baerker Aug 2 at 0:31
  • Are there still brokers who make you ask them to cross identical long and short positions? As for the short position in the underlying, you pay the borrow fee to the lender (and dividend if short on the ex-div date) but you receive interest on the proceeds from the short sale (if your broker pays interest on cash balances). – Bob Baerker Aug 2 at 1:14

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