When exercising a call option to buy the shares at the strike price, is that done in the open market?

Question

Let's say the current Market price is $50 and your strike price is $20. If you decide to exercise the option and buy your shares, is that done on the open market? Who would sell me their shares when the market price is $50? Please just answer these questions, I don't need someone to copy and paste what's at wikipedia or something. Thanks!

Answer 1

Your broker will handle it for you. Essentially, you just exercise your option and regardless of the current price, you pay the strike price for the shares, plus the fee to exercise your option which varies by broker.

What they do is match up your call options with someone who sold a call option and that person is the one selling their shares to you.

If the option is that much in the money ($30 in your example), they are fully expecting to get called out.

Most likely they've already got a hedge on their call options, most likely buying the $45 calls or just wanting to sell their stock and get a little "premium" for it by selling the call option.

Hope that helps!

Answer 2

There are two options. When you decided to buy at strike 20 you were willing to pay 20 for that stock on expiration. So on expiration the seller has the obligation to satisfy you whichever way you decide to go. One option is exercise and ask for physical delivery of stock certificates in which case he will have to buy physical shares at the exchange for 50 and hand over to you for 20 making a loss of 30.
Second option is you satisfy with the 30 profit you made and his account is debited 30 and your account is credited with that 30. Of course the brokerages are deducted at both ends.
Then you can use that 30 plus the 20 you offered to buy and buy shares for 50. Or you can pocket the profit and play again predicting the direction of the market.

Answer 3

You buy the shares from some of the accounts that are short the same options. The flip side to your exercising your option is the seller being "assigned". The precise method of determining the account that is assigned is dependent on the exchange but there is a random element to being assigned. Your clearing firm will notify the exchange's clearinghouse who will determine the accounts short the options that will have to deliver the shares.

The option sellers clearing firm will transfer the shares to your clearing firm and your clearing firm will send the money ($20 per share) to the option sellers clearing firm. The actually share transfer is done outside the open market.

Answer 4

No it is not done on the open market.

When you exercise your call option, your broker sends an exercise notice to the Option Clearinghouse Corporation (OCC). After the market closes, the OCC randomly selects a brokerage to send an assignment notice. The brokerage that receives the assignment notice through a predetermined method chooses one of their clients that has written the call option and sends the assignment notice to him and sells the shares from his account at the strike price.