Exercise
Exercise means to put into effect the right to buy or sell the underlying financial instrument specified in an options contract. In options trading, the holder of an option has the right, but not the obligation, to buy or sell the option's underlying security at a specified price on or before a specified date in the future. To exercise an option, you simply advise your broker that you wish to exercise the option in your contract. To exercise an option, you simply advise your broker that you wish to exercise the option in your contract. If the holder of a **put** option _exercises_ the contract, they will **sell** the underlying security at a stated price within a specific timeframe.
What Is Exercise?
Exercise means to put into effect the right to buy or sell the underlying financial instrument specified in an options contract. In options trading, the holder of an option has the right, but not the obligation, to buy or sell the option's underlying security at a specified price on or before a specified date in the future.
Understanding Exercise
If the owner of an option decides to buy or sell the underlying instrument — instead of allowing the contract to expire worthless or closing out the position — they will be "exercising the option," or making use of the right or privilege that is available in the contract.
An options holder may exercise their right to buy or sell the contract's underlying shares at a specified price — also called the strike price.
To exercise an option, you simply advise your broker that you wish to exercise the option in your contract. Your broker will initiate an exercise notice, which informs the seller or writer of the contract that you are exercising the option. The notice is forwarded to the option seller via the Options Clearing Corporation (OCC). The seller is obligated to fulfill the terms of an options contract if the holder exercises the contract.
The decision to exercise an option isn't always a clear-cut one. There are several factors that need to be considered and, more often than not, it's safer to hold or sell the option instead.
The majority of options contracts are not exercised but, instead, are allowed to expire worthless or are closed by opposing positions. For example, the holder of an option can close out a long call or put prior to expiration by selling it, assuming the contract has market value.
If an option expires unexercised, the holder no longer has any of the rights granted in the contract. In addition, the holder loses the premium they paid for the option, along with any commissions and fees related to its purchase.
Things to Consider When Exercising an Option
Related terms:
Automatic Exercise
Automatic exercise is a procedure where the Option Clearing Corporation will automatically exercise an "in the money" option for the holder. read more
Call
A call is an option contract and it is also the term for the establishment of prices through a call auction. The term also has several other meanings in business and finance. read more
Call Option
A call option is a contract that gives the option buyer the right to buy an underlying asset at a specified price within a specific time period. read more
Close Position
Closing a position refers to a security transaction that is the opposite of an open position, thereby nullifying it and eliminating the initial exposure. read more
Employee Stock Ownership Plan (ESOP)
An employee stock ownership plan gives workers ownership interest in the company. read more
Exercise Price
The exercise price is the strike price, or the price at which the underlying security can be bought or sold when trading options. read more
Expiration Date (Derivatives)
The expiration date of a derivative is the last day that an options or futures contract is valid. read more
Long Position
A long position conveys bullish intent as an investor will purchase the security with the hope that it will increase in value. read more
Options
Options are financial derivatives that give the buyer the right to buy or sell the underlying asset at a stated price within a specified period. read more
Options Contract
An options contract gives the holder the right to buy or sell an underlying security at a predetermined price, known as the strike price. read more