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Suppose I am an investor and now buy a call option. At the maturity date, if the strike price is lower than the market price of the asset, I decide to buy the underlying at the strike price because I am supposed to get profit from the difference between the two prices. But I don't understand how I can get the profit? Am I supposed to sell the underlying to the market immediately after it is bought?

Similar question for an put option. At maturity date, if the strike price is higher than the market price, am I supposed to buy the underlying from the market immediately before it is sold at the striking price, in order to get profit?

Thanks!

  • I don't think you're "supposed to" or "not supposed to" do that. You can if you want, or you can hold onto the stock. And you could sell an existing stock you already had. – not_a_comcast_employee Oct 31 '16 at 23:58
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In the first case, if you wish to own the stock, you just exercise the option, and buy it for the strike price. Else, you can sell the option just before expiration, it will be priced very close to its in-the-money value.

  • Thanks! In the first case i.e. call option, do you mean after I exercise the option to buy the underlying stock, I can choose to hold the stock as long as I like, and don't necessarily need to sell the stock immediately after buying it, although I can get profit from doing so because the market price is higher than the strike price now, and I may lose money if the market price may drop below the strike price sometime in the future? – Tim Sep 26 '11 at 1:52
  • Exactly, you understand. – JoeTaxpayer Sep 26 '11 at 1:58
  • After buying a put option, when shall I buy the underlying for exercising the option? Immediately before exercising the option to make sure I get the profit? Otherwise, if I buy the underlying at a much earlier time when I cannot make sure the market price will be lower than the striking price in the future, I may lose money when exercising. – Tim Sep 26 '11 at 2:20
  • You don't. If it's profitable, you sell it before expiration. – JoeTaxpayer Sep 26 '11 at 2:25
  • By "You don't", do you mean I don't need to buy the underlying? By "If it's profitable, you sell it before expiration", do you mean I can sell the put option before it expires? – Tim Sep 26 '11 at 2:54
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When you can exercie your option depends on your trading style. In the american options trading style (the most popular) you're allowed to exercice your options and make profit (if any) whenever you want before the expiration date. Thus, the decision of exercising your option and make a profit out of it does not rely only on the asset price. The reason is, you already paid for the premium to get the option. So, if taken into account the underlying price AND your premium, your investment is profitable then you can exercice your contract anytime.

  • Thanks! My post is not asking about when to exercise the option, but when and how to realize the profit. – Tim Sep 26 '11 at 1:37
  • All explained! read it again. You can exercice your option whenever you want even immediately after you bought it (if you're trading the american options). And to realize profit, for example if you purchased a call option the underlying price must be more than the strike price added to the premium. Also, consider for each option the minimum asset you're able to buy is 100. – Stephane Kouakou Sep 26 '11 at 1:44
  • Also, "exercising" means taking your profit as you'll probably let your option expired worthless if it turns to be a loss. – Stephane Kouakou Sep 26 '11 at 1:47
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No, if you are trading options to profit solely off the option and not own the underlying, you should trade it away because it costs more to exercise:

  1. There is an exercise fee.
  2. Brokers are now shying away from permitting exercises that would violate margin rules, so if you're barely in the money then they won't let you do it anyways.
  3. An in the money option's price + the exercise price will always have a premium, even if it's ever so slight, over the price of the underlying until very close to expiration, so you will lose that excess if you exercise.

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