What Is Exercise?
Exercising an option means to put into effect the right to buy or sell the underlying financial instrument specified in an options contract. In options trading, the holder of an option has the right, but not the obligation, to buy or sell the option’s underlying security at a specified price on or before a specified date in the future.
Key Takeaways
- In options trading, “to exercise” means to put into effect the right to buy or sell the underlying security specified in the options contract.
- To exercise an option, you simply notify your broker that you wish to exercise the option in your contract.
- If the holder of a put option exercises the contract, they will sell the underlying security at a specified price within a defined timeframe.
- If the holder of a call option exercises the contract, they will buy the underlying security at a specified price within a defined timeframe.
- It is crucial to consider the type of option and exercise feasibility before making a decision.
Understanding Exercise
When the owner of an option decides to buy or sell the underlying instrument instead of allowing the contract to expire worthless or closing out the position, they will be
Related Terms: Options Contract, Underlying Security, Call Option, Put Option, Exercise Price.
References
Get ready to put your knowledge to the test with this intriguing quiz!
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## What is exercise in the context of options trading?
- [ ] Buying stocks in the open market
- [ ] Short-selling securities
- [ ] Hedging positions using futures
- [x] Executing the right to buy or sell the underlying asset
## When an investor "exercises" an option, what do they accomplish?
- [ ] Cancelling the option contract
- [x] Utilizing the right to buy or sell the asset as specified in the contract
- [ ] Extending the expiration date of the option
- [ ] Converting the option into a derivative
## What is typically needed for an option holder to exercise their option?
- [x] Paying any strike price and relevant fees
- [ ] Having a certain amount of underlying asset in their account
- [ ] Receiving a margin call approval
- [ ] Confirming from a third-party holder
## What is the last date on which an option can be exercised known as?
- [ ] Inception date
- [ ] Strike date
- [ ] Issue date
- [x] Expiration date
## If an option is "in the money," it means:
- [ ] The option has lost its value
- [ ] The option's underlying stock has no value change
- [x] The option has intrinsic value, and exercise makes financial sense
- [ ] The option cannot be exercised
## Which of the following types of options can only be exercised on its expiration date?
- [ ] American options
- [x] European options
- [ ] Asian options
- [ ] Bermudian options
## When is an "automatic exercise" likely to occur?
- [ ] When the option is out of the money
- [ ] During market holidays
- [ ] Automatically whenever there are open positions
- [x] At expiration if the option is in the money
## What do you call the price at which the option holder can buy or sell the underlying security?
- [ ] Future price
- [ ] Market price
- [ ] Trading price
- [x] Strike price
## How do investors typically decide whether to exercise an option?
- [ ] Based on industry rumors and speculations
- [ ] If the matching index hits a threshold
- [ ] By the timing of market closings
- [x] Based on whether it's profitable compared to the market price of the underlying asset
## Which type of options permit partial exercise before their expiration date?
- [x] American options
- [ ] European options
- [ ] Asian options
- [ ] Standardized options
