Do I have to pay the 'call option' price or does the broker do it all and just gives me the difference?

Question

Let's say I purchased a call option to buy a certain stock at $10, and the stock climbs to $15 and I want to exercise the option. Am I required to have the money on hand and buy the 100 shares to turn around and resell it, or does the broker do all of that and just gives me the difference (profit)?

Answer 1

If there's any time value still left on the option, your best bet is typically to sell your call option and pocket your profit!

So, with your example, perhaps you bought the $10 call option when the stock was at $11, for $2. You had $1 intrinsic value and $1 of "time" value in the option.

As the stock rose to $15, your intrinsic value went up to $5, and your "time" value decreased.

If you still had say $0.20 or whatever in time value, sell the option for $5.20 or whatever, and pocket the difference.

This way is not only simpler, but will save you the fee you pay to your broker for exercising your option and buy the shares and subsequent commission to your broker to sell the shares.

If you exercise the option, or it gets exercised at expiration, depending on your account size/liquidity, you may need to liquidate the position (sell your new shares) before being allowed to make any additional trades. From experience, this can be a royal pain in the butt, especially if you have other trades you may want to make that morning.

In the long run, letting the options get exercised sometimes costs you a LOT more hassle than it's worth!

Hope that helps!

Answer 2

When you buy or go long on a call option position, you have essentially bought the rights to buy the shares at the options strike price. IN USA, it means you have the right to buy 100 shares at the strike price, in Australia, it's 1000 shares.

Anyway, my point is you are not obligated to buy the shares. YOu have many choices with your call option. YOu could:

1) Exercise the option and buy the shares at the exercise/strike price.

2) Let the option expire worthless

3) Sell the same option at a higher price and for a profit/income..

Just let your broker know what you'd like to do. Remember you are not obligated to do any particular thing. This is why it's called an option. It gives you options.