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"Do I Have To Exercise To Take Profit On Call Options?"


Question By Fola

"Do I Have To Exercise To Take Profit On Call Options?"

I bought a call option. If the underlying stock went up in value as predicted, do I have to buy the stock (exercise) then resell to close and lock in profit?

Asked on 6 July 2009

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Answered by Mr. OppiE

Hi Fola,

If your call options are already in profit, there is no need to exercise it in order to take profit. In fact, if there is still time to expiration remaining in those call options, you would make a higher profit if you simply sell the call options at its higher price now rather than to exercise, due to the extrinsic value remaining in the call option. Remember, in options trading, you have the RIGHT but not the OBLIGATION to exercise the options that you bought.

Here is an illustration:

Assuming you bought 1 contract of AAPL's July $130 Call options at $3.50 when AAPL was trading at $130. AAPL rises to $138.61 and those call options are now trading at $9.40. There is still 2 weeks to expiration and you wish to close the position and take profit.

Option 1 : Exercise the call options and sell the stocks
You exercises the call options to buy AAPL at $130. You instantly sell it for $138.61, making $5.11 in profit ($8.61 - $3.50).

Option 2 : Sell the Call options
You sell the call options at $9.40 and makes a profit of $5.90 ($9.40 - $3.50).

As you can see above, selling the call options gives you a higher profit due to the extrinsic value still remaining in the option. Those extrinsic value goes to waste if you exercise the call options. Also, exercising an option involves more commissions than simply selling those options. This is why options traders rarely exercise call options unless they are doing so in order to hold the stock for the long term, never to resell in order to lock in profit.




In conclusion, if you own profit call options positions and wish to close the position and take profit, the best way to go is to simply sell those call options using the Sell To Close order rather than to exercise them. You should exercise profitable call options only when you decide to own and hold the stock itself for its longer term investment value.

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