How do I exercise an option on Etrade? |

If you’re trying to explore the financial markets, trading options on Etrade can be a great way to get started. But before you jump in head first, it’s important to understand the basics of exercising an option on Etrade. To help make this process easier, we’ll walk you through everything you need to know about exercising an option on Etrade!

What is the difference between selling an option and exercising?

When an option trader buys an option contract, they have the right, but not the obligation, to exercise their long position by either buying or selling the underlying asset (e.g. stock). The buyer of an option may choose to exercise a call or a put at anytime prior to expiration if it is in-the-money. Exercising an option closes out the existing position and creates an opposite obligation for the seller of that option.

Exercising is different from selling because it involves entering into a new contract on terms prescribed by the Option Clearing Corp (OCC) as opposed to entering into a transaction with another counterparty on terms negotiated between them.

When someone exercises their long option, they become responsible for notifying their broker that they wish to buy or sell shares of the underlying asset (the stock). Their broker will then notify their clearing house which in turn will notify OCC formally and electronically via FIX Protocol. Depending on whether you are exercising a call or put, you may be required to post margin at your broker.

What happens when an option hits the strike price?

When exercising an option, it is important to be aware of the implications of executing your option. If the strike price of an option is met (or exceeded), then the holder of that option can either choose to buy or sell the underlying stock at that price no matter what the current market price is.

When exercising a call option, if you choose to purchase the underlying stock at the strike price, you will pay commission and other fees related to purchasing that stock outright though E-trade. When exercising a put option, if you choose to sell the underlying stock at the strike price, then you will receive cash equal to that amount though E-trade after fees are subtracted.

It is important to note that exercise must occur on or before expiration day – otherwise your position will expire worthless. Additionally, if your option contract was originally executed as part of a spread strategy or other multiple leg order, be sure all legs are exercised properly according to your strategy.

What happens if my call option expires in the money?

If your call option expires in the money, meaning the underlying security has a higher market price than the option strike price when it expires, you have two choices.

You can either exercise your option and purchase the underlying asset at the option’s strike price, or you can choose to sell your option before its expiration date for a profit. It is important to note that when exercising an option, you no longer have rights to buy or sell the underlying security; rather, you are obligated to buy it.

When exercising an option on Etrade, go to “My Positions” under “My Accounts.” Click on your expiring call options and click “Exercise Options,” then confirm with “Exercise Now.” Also remember that while all of these steps are required for exercising an expiring call options on Etrade, exchanges such as CBOE (Chicago Board Options Exchange) may require additional steps for exercising in-the-money options.

Do I pay taxes when I exercise options?

When you exercise an option on Etrade, it is important to understand that taxes may be due depending on the nature of the option and when you exercised it.

If you exercise an American style call or put option, then any gains realized are, in most cases, taxable as short-term capital gains. This means that the gain will be included in your ordinary income and taxed at your marginal rate. If you held the option for more than one year, then any gains from exercising may qualify as long-term capital gains and be taxed at a more favorable rate.

In addition to capital gains taxes, most options transactions are subject to complex tax rules relating to alternative minimum tax (AMT), wash sale rules, Section 1256 treatment, state income tax laws and so on. It is important that investors consider their individual tax situation before making decisions about exercising options on Etrade or any other platform. Professional assistance from a qualified accountant can help investors understand their full financial implications for exercising options on Etrade for the upcoming year’s taxes.

How does a put option make money?

A put option is a financial contract between two parties, the buyer and the seller. Put options give the buyer the right to “put” their shares of an underlying asset, such as a stock, back to another party at predetermined strike price. The buyer pays a fee (premium) to the seller for this right.

If you purchase a put option, you can make money if the underlying stock falls in value from your strike price down to zero. If it falls beyond zero, then you will make even more money. Your potential payoff is unlimited with a put option on Etrade. When your stock goes below your strike price and looks like it won’t grow back up in value again, this is when you can profit from exercising your put option on Etrade by selling off the stocks at their lower price or having them expire worthless so that you can pocket any profits.