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
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.
