Exercising Options: How & When To Exercise Options (2024)

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The holder of an American-style option can exercise their right to buy (in the case of a call) or to sell (in the case of a put) the underlying shares of stock at any time. The holder of a European-style option can only exercise their right at expiration. Both contract styles can be closed on the option's market at any time.

They first must direct their brokerage firm to submit an exercise notice to the Options Clearing Corporation (OCC). For an option holder to ensure that they exercise the option on that particular day, the holder must notify his brokerage firm before that day’s cut-off time for accepting exercise instructions.

The brokerage firm notifies OCC that an option holder wishes to exercise an option. OCC then randomly assigns the exercise notice to a clearing member. For an investor, this is generally his brokerage firm chosen at random from a total pool of such firms. The firm must then assign one of its customers who has written (and not covered) that particular option.

Assignment to a customer is either random or on a first-in-first-out basis. This depends on the firm’s method. Merrill handles assignment on a random basis when the OCC assigns an exercise notice.

Submitting Exercise or Do-Not-Exercise Instructions:

• All Instructions must be called in and are only applicable to long positions
• Do-Not-Exercise instructions can only be submitted the day of expiration up through market close
• Exercise instructions can be submitted at any time until expiration
• Merrill may take action at any time to close out positions that may not be able to be supported if exercised/assigned. It is extremely important to monitor your open options positions and be aware of your risk exposure.

Assignment

Select to close help pop-upAn option is at the money if the strike price of the option is equal to the market price of the underlying security.

Select to close help pop-upA call option is out of the money if the strike price is greater than the market price of the underlying security. A put option is out of the money if the strike price is less than the market price of the underlying security.

To avoid assignment on a written option contract on a given day, the position must be closed out before that day's market close. Once assignment is received, an investor has no alternative but to fulfill assignment obligations per the terms of the contract.

There is generally no exercise or assignment activity on options that expire out-of-the-money. Owners usually let them expire with no value. Although this is not always the case as post-market underlying moves may lead to out-of-the-money options being exercised and in-the-money options not being exercised.

For illustrative purposes only.

What's the Net?

When an investor exercises a call option, the net price paid for the underlying stock on a per share basis is the sum of the call's strike price plus the premium paid for the call. Likewise, when an investor who has written a call contract is assigned an exercise notice on that call, the net price received on per share basis is the sum of the call's strike price plus the premium received from the call's initial sale.

When an investor exercises a put option, the net price received for the underlying stock on per share basis is the sum of the put's strike price less the premium paid for the put. Likewise, when an investor who has written a put contract is assigned an exercise notice on that put, the net price paid for the underlying stock on per share basis is the sum of the put's strike price less the premium received from the put's initial sale.

Automatic Exercise/ Assignment

If the client holds long in his or her account U.S. equity options contracts that are in-the-money by $.01 or more at expiration, they will be automatically exercised upon expiration unless contrary instructions are submitted prior to the applicable exercise cutoff times. For more details, refer to the Merrill Options Agreement.

If the client holds long in his or her account index options contracts that are greater than or equal to $.01 in-the-money as determined by the Options Clearing Corporation at the close of business prior to expiration date, and the Firm does not receive exercise instructions from the client on the business day prior to expiration, auto-exercise may occur.

Early Exercise/Assignment

For call contracts, owners might exercise early to own the underlying stock to receive a dividend.

It is extremely important to realize that assignment of exercise notices can occur early, days or weeks in advance of expiration day. Investors should expect this as expiration nears with a call considerably in-the-money and a sizeable dividend payment approaching. Call writers should be aware of dividend dates and the possibility of early assignment.

When puts become deep in-the-money, most professional option traders exercise before expiration. Therefore, investors with short positions in deep in-the-money puts should be prepared for the possibility of early assignment on these contracts.

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Options involve risk and are not suitable for all investors. Certain requirements must be met to trade options. Before engaging in the purchase or sale of options, investors should understand the nature of and extent of their rights and obligations and be aware of the risks involved in investing with options. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options (PDF)" before considering any option transaction. You may also call the Investment Center at 877.653.4732 for a copy. A separate client agreement is needed. Multi-leg option orders are charged one base commission per order, plus a per-contract charge.

The maximum loss, gain and breakeven of any options strategy only remains as defined so long as the strategy contains all original positions. Trading, rolling, assignment, or exercise of any portion of the strategy will result in a new maximum loss, gain and breakeven calculation, which will be materially different from the calculation when the strategy remains intact with all of the contemplated legs or positions. This is applicable to all options strategies inclusive of long options, short options and spreads. To learn more about Merrill's uncovered option handling practices, view Naked Option Stress Analysis (NOSA) (PDF).

Early assignment risk is always present for option writers (specific to American-style options only). Early assignment risk may be amplified in the event a call writer is short an option during the period the underlying security has an ex-dividend date. This is referred to as dividend risk.

Long options are exercised and short options are assigned. Note that American-style options can be assigned/exercised at any time through the day of expiration without prior notice. Options can be assigned/exercised after market close on expiration day. View specific Merrill Option Exercise & Assignment Practices (PDF).

Supporting documentation for any claims, comparison, recommendations, statistics, or other technical data, will be supplied upon request.

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