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Read How to Exercise Options in An Option Contract

Exercise Of Options

When an individual purchases an option contract, he/she obtains the right to redeem the terms set forth in this financial agreement. However, an option contract holder is not required to adhere to the terms of a call option. When an investor does choose to take advantage of the conditions of his/her option contract, he/she is exercising options. An individual will only take part in exercising options if the terms of the contract will benefit him/her.

Whether buying or selling stocks, when utilizing an option contract will be detrimental to the buyer's investments, he/she is not obligated to utilize the contract. However, if the buyer wishes to partake in exercising options, the seller will be required to adhere to the conditions of the option contract whether it would benefit him/her or not. An option contract presents both buyers and sellers with the risk of losing financial assets. If a buyer chooses to engage in exercising options, this means the conditions of the agreement will benefit him/her. In most cases, this also indicates that the terms of the contract will adversely affect the seller. However, if the buyer does not utilize his/her option contract, then he/she will lose the premium fee that he/she was required to provide.


Whether or not an investor exercises his/her options is dependent upon the condition of the stock market and the type of option that the buyer purchased. Generally, whether a buyer exercises his/her right to redeem contract conditions will be contingent upon whether there is an increase or decrease in stock value. If the stock values will favor a buyer, then he/she may choose to utilize his/her option contract. However, the contract must be redeemed before the date of expiration specified within the contract. Once the option expires, the buyer will no longer be permitted to redeem the terms of the agreement.

The type of option that an investor purchases will dictate when he/she is able to exercise the option. If an individual purchases an American-style contract, he/she can choose to exercise the option at any point before the option expires. However, if an investor obtains a European-style contract, he/she may only redeem the terms of the agreement on the date of expiration. Bermudan-style contracts specify certain dates on which the contract may be exercised.

The options contract that a buyer obtains will also specify the type of settlement that an investor will receive. A buyer may either be granted a cash settlement or a physical settlement. While physical settlement involves the transfer of underlying securities, cash settlements involve the payment of the monetary value of the underling securities.

An investor should be cautious when exercising options, as exercising at the wrong time may not yield the highest attainable profit. There are various different strategies associated with options trading and exercising. Becoming familiar with these strategies may help an individual to obtain the highest possible profit on his/her investment.

NEXT: Real Estate Options You Must Know

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