How to Exercize a Stock Option

Options may be traded on many stocks.

Most traders buy and sell stock options just as they would stock. That is, they buy an option and when it rises in value, they sell for a profit. However, stock options are more flexible than this. A stock option contract controls 100 shares of an underlying stock. The option contract designates a price which you may pay for this stock regardless of the stock's current value. Thus, you may wish to "exercise" a contract by simultaneously giving up ownership of the contract while purchasing the underlying shares. If you exercise five contracts, you will end up with 500 shares.

Instructions

1. Log in to your brokerage account.

2. Identify the stock option position you want to exercise. Most brokers will list this in a special area of the trading platform called "Accounts," "Holdings," "Positions," or "Monitor."

3. Click the "Exercise" button for the stock option position you want to exercise. Many brokers offer this feature along with other typical trading commands, such as "Buy" and "Sell." You will only see the exercise feature for stock option positions you already have. It is not possible to exercise a stock option until after it is purchased.

4. Call your broker if you do not see an exercise feature. Some brokers only provide the ability to exercise a stock option over the phone. Even if the stock option exercise feature is present in the software, some traders prefer the assurance that human contact provides with exercising an option. Exercising is one of the most significant types of trades available, as it requires not just the purchase of hundreds of shares of stock, but also a price adjustment for those shares based on the option contract's parameters.

5. Verify that the actual shares of stock in your account have been properly adjusted following the exercising of a stock option. If the stock was bought or sold at the current market value, rather than the stock option's contracted price, call your broker immediately as this is an error in the process.

Tips & Warnings

• The "call" option allows you to buy stock at the specified price. If you exercise the call option, you buy stock. The "put" option allows you to sell a stock at a specified price. If you exercise a put option, you will sell shares you already own at the contract's defined price.

• Most brokers charge a fee for exercising a stock option. This fee is typically between $15 and $25. Additionally, all stock options that have value on their expiration date are automatically exercised by most American brokers. If you do not sell the option by its expiration, your account will automatically be adjusted with the purchase or sale of stock on the option's expiration date.

References

• Fidelity: Exercising Stock Options
• Options Trading Tutorial: Options A to Z: Exercising Options in Think or Swim
• Trade King: Trading