Good evening everyone. I know a very little about option trading. I’d like to know, Do I need the money in my account to exercise/close a option on or before the expiration date ? When I exercise can I sell the shares to the open market then give the seller the strike price and keep the difference? Or do I need to pay the seller of the option first ? I would like to thank everyone in advance.
there is an abundance of very recent threads that address each of your questions. apart from that, your broker will be able to answer them in a more specific way. if you haven't picked a broker yet, there's plenty of recent threads on that too. poke around the first 3 or so pages of threads and you'll find what you're looking for.
You might be a little confused on how an ordinary option trade works. Most people buying options close out their position before the option expires. Most do not take or plan to take delivery of the shares.
Correct, most options are exercised/closed before expiration. I’m just asking as last resort, people can exercise on the last day. Let’s say a call option - X stock with a strike price of $120 with a premium of $3.00, it is three days before expiration and the stock now is at $128. I want to close/exercise the option, but I don’t have enough funds in my account to do so. Can I close/exercise by selling the shares of that option on the open market first for the $128, then give the seller of the option the $12,000 = $120 /1 call option and keep the leftover $800? Or is this considered “free-riding” ? is this Acceptable to do so since I have 2 to 3 days to settle the account?
You should consult your broker to make sure. Generally, you have to have the funds to exercise an option. I am only speaking from my experience and broker. I have probably, exercised an option just once. Most times, I just sell the option to close my trade.
There may be broker specific rules. In general you have three days to flip the underlying security. If it is cash account then it is "free riding". If you have margin and > 25K in the account, you probably dont need to worry as long as you are aware of the consequences of drawing into your margin. If this is an auto exercise it can also trigger a margin call. always remember, if you are long on a call option, you need to watch for ex dividend date of the security so you can exercise early. When option is about to expire, you may get notification from the broker. When you buy a call option, you would have performed a buy to open. You can do a "sell to close" to close out the position as an alternative to exercise. You dont need to short sell upfront. Your brokerage support will be able to clarify items specific to your account.
I suspect with a call option $120 strike and the stock is at $128 with 3 days to expiration that the premium or price of the option would be more than $3. You are also assuming that the price of the stock will stay at $128 between the time you exercise and the time you sell. Not always the case. Almost always best to sell the option for the premium. Just because you bought a call option does not mean you are obligated to take delivery of the shares. Bottom line - To do what you have describe you would have to check with your broker.
Thank you everyone. It was my first post on this site and it seems everyone there is helpful. I hope to one day return the favor.