How to exercise, roll, and assign options | Fidelity (2024)

FAQs

How do I exercise my options? ›

In options trading, "to exercise" means to put into effect the right to buy or sell the underlying security that is specified in the options contract. To exercise an option, you simply advise your broker that you wish to exercise the option in your contract.

When the owner claims the right (i.e. takes a long or short position in the underlying security) that's known as exercising the option. ⁴. Assignment happens when someone who is short a call or put is forced to sell (in the case of the call) or buy (in the case of a put) the underlying stock.

Exercising a put is when the option holder opts to sell the underlying security at the strike price. If the option has intrinsic value of at least $0.01 at expiration, it will be automatically exercised.

Roll out: Buy back your existing short call and roll it out to the same strike at a further expiration date. This can be useful when the stock price has remained stable through the life of the option. Roll up and out: Buy back your existing short call and roll it to a higher strike price at a further expiration date.

Occasionally a stock pays a big dividend and exercising a call option to capture the dividend may be worthwhile. Or, if you own an option that is deep in the money, you may not be able to sell it at fair value. If bids are too low, however, it may be preferable to exercise the option to buy or sell the stock.

Note that American-style options can be assigned/exercised at any time through the day of expiration without prior notice. Options can be assigned/exercised after market close on expiration day. View specific Merrill Option Exercise & Assignment Practices (PDF).

For example, a call option with a strike price of $50 would be in-the-money if the market price is $55. The investor who is exercising the call option would have the opportunity to purchase the stock at $50 and therefore earn $5. An in-the-money put option is when the exercise price is above the market price.

For example, if you own a stock at $100 per share and sell a $130 strike call option, you will be forced to sell if the stock is above $130 on the expiration date. Additionally, you can be assigned before the expiration date if the stock is trading above your strike price.

If you believe the stock price will rise over time, you can take advantage of the long-term nature of the option and wait to exercise them until the market price of the issuer stock exceeds your grant price and you feel that you are ready to exercise your stock options.

Rolling your options

This involves closing out your existing options position (by selling to close a long position or buying to close a short position) that is about to expire and simultaneously purchasing a substantially similar options position, only with a later expiration date.

What happens if I don't exercise my stock options? ›

Because if you don't exercise your options before the expiration date, they will be worth absolutely nothing. Nada. Zip. Options are very much a use-it-or-lose-it proposition, and it could be very painful to “lose it” if your strike price is below the current fair market value of the common stock.

Regular option rates (as shown above) apply when the contract price exceeds 65¢. Maximum charge: 5% of principal (subject to a minimum charge of $12.95 for FAST trades and $32.95 for Rep-Assisted trades). Exercises and assignments are commission-free and are not charged a per contract fee.

The most common risk from rolling options up is the time decay, or theta, of the options. As expiration approaches, the value of the option will decrease at an accelerated rate. This is due to the loss of time value and is magnified if you are rolling up to a longer-dated option.

To roll an option (or multiple options in a position), you need to reverse the original trade and then buy or sell another option. For example, if you sold a bull put spread with a $50 short put strike and a $45 long put strike, you would buy-to-close the $50 put and sell-to-close the $45 put.

Does Rolling Options Count as a Day Trade? A day trade is any trade, whether that's buying or selling, that takes place within a single day. Options may count as day trades. But they tend to count as single trades because they are held in one contract.

Typically, put option investors only exercise their right to sell their shares at the exercise price if the price of the underlying is below the strike price. Likewise, call options are usually only exercised if the price of the underlying is trading above the strike price.

For example, if you own a call option with a strike price of $30 and market prices rise to $35, you could exercise your option and buy 100 shares for $3,000 ($30 x 100) rather than pay $3,500 on the open market. In this case you would make a profit of $500 by exercising early.

For example, if an employee has the option to buy 1,000 shares at a strike price of $10, they will need $10,000 to carry out a cash transaction. After this transaction, the employee owns these shares outright and can choose to sell them or retain them.

In short, you should exercise your stock options when they have value. But there are other factors to remember, including tax implications and your current financial situation. Whether you're changing careers or your current company is going public, you may have questions about when to exercise stock options.