What is an exercised option?
An exercised option is when the person holding the option decides to buy or sell the underlying shares from the option’s issuer at a predetermined price.
Every option holder has the right to do this but is not obligated to do so. If the option holder decides not to buy or sell the underlying shares, they can close the position or let the option expire.
Where have you heard about exercised options?
You may have heard about exercising options in baseball. For example, a player may have a contract to play with a team for a certain number of years, plus an option for longer. If the player or the team exercise this option, they decide that the player will play with the team for longer.
What you need to know about exercised options.
There are three main types of option style which affect how and when the option can be exercised:
- American – the option can be exercised any time before the expiry date. These are the most commonly traded.
- European – the option can only be exercised on the expiry date.
- Bermudan – the option can only be exercised on specific dates.
An investor can benefit from exercising a call option when the stock price is higher than the strike price you can buy the stock for less and sell it for more. An investor can benefit from exercising a put option when the opposite is true – the stock price is lower than the strike price. Then you can sell the stock for more and buy it back for less.
Most options are not exercised because it increases the risk and can add more interest or other costs to do it. Some options are also not worth exercising.