1

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!

JoeTaxpayer
  • 172,694
  • 34
  • 299
  • 561
Tim
  • 5,903
  • 21
  • 65
  • 88

3 Answers3

3

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.

JoeTaxpayer
  • 172,694
  • 34
  • 299
  • 561
2

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.
1

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.

Stephane
  • 151
  • 2