How to Exercise & Hold Stock Options
Exchange traded stock options are financial instruments that, for a fee, gives the option holder a contract to buy or sell a particular stock at a specific price anytime prior to the exercise date. Once the option is contracted, the holder waits for a change in the market that's beneficial to the stance taken in the contract. As a holder, you can then exercise the option, buying the contracted stock from the other contract participant at the agreed upon option price, or selling stock you hold to the other participant at the agreed upon price. The only risk taken by the option holder is the fee paid upon creating the contract.
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Instructions
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Locate a stock brokerage that allows the purchase of options contracts. Most large brokerage houses handle options, but you can be sure of the determination by contacting them by phone or checking their website for information.
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Choose the contract date that you want the option to expire --- this is the exercise date. The further away the date, the more expensive the contract as the more market is likely to change during that period.
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Pick a price that you want to set the option at, and whether you want an option to buy stock at that price or sell stock at that price. The option contract gives you the rights to buy or sell according to the contract at that price any time before the end of the options period. The greater the difference between the current price of the stock and the option price the more costly the purchase that option will be.
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Purchase the stock option, paying the fee, known as the premium for the option.
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Watch the market for an opportune time to exercise the option. If you contracted a put option, the right to sell the stock at the option price you should wait until the stock falls below the option price before you exercise. If you contracted a call option, the right to buy the stock, then wait for the market price to rise above the option price before exercising the option.
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Contact the broker to exercise the option if the market is favorable before the exercise date. Exercise the option to use the contracted terms. When you exercise the option, you complete a buy or sell transaction at the option price, profiting the difference in price between the actual market price of the stock and the contract price of the option.
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