Options trading can be an exciting way to potentially amplify your returns or hedge existing positions. If you've been dabbling in call options on Merrill Edge and now find yourself with an "in-the-money" contract, the next step might be to exercise it. But how exactly do you do that? This comprehensive guide will walk you through the process, step by step, on Merrill Edge.
Ready to unlock the potential of your call option? Let's dive in!
Understanding the Basics: What is Exercising a Call Option?
Before we get into the "how-to," let's quickly recap what exercising a call option means. When you buy a call option, you purchase the right, but not the obligation, to buy 100 shares of an underlying stock at a predetermined price (the "strike price") on or before a specific date (the "expiration date").
Exercising your call option means you are choosing to use that right. You're telling the option seller, "I want to buy those 100 shares at the strike price!" This is typically done when the current market price of the underlying stock is above your strike price, making it profitable to buy at the lower strike price and then potentially sell at the higher market price, or simply hold the shares.
Important Note: American-style options can be exercised at any time up to and including the expiration date. European-style options can only be exercised on the expiration date. Most equity options traded on Merrill Edge are American-style.
Step 1: Confirm Your Option's Eligibility and Profitability
This is where you engage your inner financial detective! The very first thing you need to do is verify if exercising your call option is the right move for you.
Sub-heading: Is Your Option "In-the-Money"?
An option is "in-the-money" (ITM) if exercising it would result in a profit. For a call option, this means the current market price of the underlying stock is higher than your call option's strike price.
Example: If you have a call option for ABC stock with a strike price of $50, and ABC is currently trading at $55, your option is $5 in-the-money (per share).
Sub-heading: Do You Have Sufficient Funds?
When you exercise a call option, you are committing to buy 100 shares of the underlying stock per contract. This means you need enough cash in your Merrill Edge account to cover the cost of purchasing these shares at the strike price.
Calculation: (Strike Price) x (Number of Shares per Contract, typically 100) x (Number of Contracts) = Total Cash Needed
For instance, if you have 2 call options for ABC at a $50 strike, you'll need $50 x 100 x 2 = $10,000 in your account.
What if I don't have enough cash? Merrill Edge may allow you to exercise on margin, if your account is approved for margin trading. However, incurring margin debt comes with additional risks and interest charges. You might also consider a "cashless exercise" if available, where some of the shares received are immediately sold to cover the cost.
Sub-heading: Consider Alternatives to Exercise
Exercising isn't always the best option. Sometimes, it's more advantageous to simply sell your call option on the open market before expiration.
Why sell instead of exercise? When you sell an in-the-money option, you receive the intrinsic value (the difference between the stock price and strike price) plus any remaining extrinsic value (time value and implied volatility). By exercising, you only capture the intrinsic value. If there's significant extrinsic value remaining, selling the option might yield a higher profit than exercising.
When is exercising typically preferred? When you genuinely want to own the underlying shares, or when the extrinsic value of the option has significantly diminished (e.g., closer to expiration).
Step 2: Access Your Merrill Edge Account
Alright, you've decided to proceed with exercising. Now, let's get online.
Sub-heading: Log In to Merrill Edge
Go to the official Merrill Edge website:
www.merrilledge.com Locate the "Log In" button, usually in the top right corner.
Enter your User ID and Password.
You may be prompted for a two-factor authentication code (e.g., via text message or email) for security. Enter the code to proceed.
Sub-heading: Navigate to Your Holdings
Once logged in, you'll need to find your options positions.
Look for a section typically labeled "Accounts," "Portfolio," or "Holdings."
Click on the relevant account where your call option is held.
You should see a list of your current investments. Locate your call option contract within this list.
Step 3: Initiate the Exercise Request (The Critical Step!)
This is where the rubber meets the road. Merrill Edge typically provides a straightforward way to exercise your options, but the exact steps might vary slightly depending on their current platform interface.
Sub-heading: Locate the "Exercise" or "Trade" Option
Next to your specific call option position, you should see options like "Trade," "Sell," or possibly a dedicated "Exercise" button or link.
Click on the appropriate option to begin the exercise process. If you don't see an explicit "Exercise" option, clicking "Trade" for the option might present "Exercise" as one of the transaction types.
Sub-heading: Review Exercise Details
The platform will typically present a summary of your option and the potential exercise.
Verify the Option Details: Double-check that you are indeed exercising the correct call option (ticker symbol, strike price, expiration date).
Confirm Quantity: Specify the number of contracts you wish to exercise. Remember, each contract represents 100 shares.
Review Cost: The platform should display the total cost of the shares you will acquire by exercising. Ensure this aligns with your available cash or margin capacity.
Understand Potential Fees: Be aware of any exercise fees or commissions that Merrill Edge may charge. While many brokers offer $0 commissions on option trades, exercise fees might still apply. Check Merrill Edge's pricing schedule for the most accurate information.
Sub-heading: Submit Your Exercise Instruction
Once you've reviewed all the details and are confident in your decision, you'll typically click a "Submit," "Confirm," or "Place Order" button.
You may receive a final confirmation pop-up or need to enter a trading password.
Step 4: Confirm and Monitor Your Transaction
After submitting your exercise request, it's important to monitor its status.
Sub-heading: Check Order Status
Look for a section on Merrill Edge typically labeled "Order Status," "Pending Orders," or "Activity."
Your exercise request should appear here. It might show as "Pending," "Processing," or "Executed."
Sub-heading: Await Share Delivery
Once your exercise request is processed, the underlying shares will be delivered to your Merrill Edge account. This usually happens the next business day (T+1 for options, then T+2 for stock settlement).
Verification: After the settlement period, check your "Holdings" or "Positions" page to confirm that the shares have been added to your account and that your cash balance has been debited accordingly.
Step 5: Consider Your Next Move for the Acquired Shares
Now that you own the shares, what's next?
Sub-heading: Hold the Shares
If your original intention was to own the stock for the long term, you can simply hold the shares.
Remember your investment thesis for why you wanted to own the stock in the first place.
Sub-heading: Sell the Shares
If you exercised the option purely for the profit, you can now sell the shares at the current market price.
Go to the "Trade" section, select "Stocks," enter the ticker symbol, choose "Sell," specify the quantity, and place your order.
Important: Be mindful of capital gains taxes. The difference between your effective purchase price (strike price + original premium paid for the option) and the selling price of the stock will determine your profit or loss for tax purposes. Consult a tax professional for personalized advice.
What to Do If You Encounter Issues or Have Questions
Sometimes, the online process might not be clear, or you might have a specific question. Don't hesitate to reach out to Merrill Edge directly.
Contact Customer Service: Merrill Edge offers various ways to contact their customer support:
Phone: Look for their customer service number on their "Contact Us" page. (e.g., 1.877.653.4732 for Self-Directed Clients)
Secure Message: You can often send a secure message through your online account.
Chat: Some platforms offer a live chat feature.
Be Prepared: When contacting support, have your account number, the option's ticker symbol, strike price, and expiration date ready.
10 Related FAQ Questions
How to check if my Merrill Edge account is approved for options trading?
You can typically check your options trading approval level by navigating to your account settings or profile within the Merrill Edge platform, or by contacting their customer service directly.
How to know the cut-off time for exercising options on Merrill Edge?
Merrill Edge, like most brokers, has a cut-off time for accepting exercise instructions on expiration day. This is usually in the late afternoon/early evening on the expiration date (e.g., 5:00 PM ET), but it's crucial to confirm the exact time with Merrill Edge's customer service or by checking their specific "Option Exercise & Assignment Practices" documentation, often found in their help or education sections.
How to calculate the break-even point for a call option I exercised?
The break-even point for a call option you exercised is your strike price plus the premium you originally paid per share for the call option. For example, if your strike was $50 and you paid $2.00 premium per share ($200 per contract), your break-even is $52.00.
How to perform a "cashless exercise" on Merrill Edge?
A cashless exercise allows you to exercise your in-the-money call option without using your own cash. Instead, a portion of the shares you receive from exercising are immediately sold to cover the cost of the remaining shares. This is typically an option presented during the exercise process if available, or you might need to contact Merrill Edge directly to arrange it. Availability can depend on account type and approval.
How to determine the tax implications of exercising a call option?
When you exercise a call option, you acquire shares, which is not a taxable event itself. However, when you sell those shares, any profit (selling price minus your effective cost basis: strike price + premium paid) will be subject to capital gains tax. The holding period (short-term vs. long-term) for the shares begins on the day after the option is exercised. Always consult with a qualified tax professional for personalized advice.
How to avoid automatic exercise of an in-the-money call option on Merrill Edge?
Merrill Edge generally automatically exercises in-the-money American-style options at expiration unless you submit "Do Not Exercise" (DNE) instructions. If you wish to avoid automatic exercise, you must contact Merrill Edge customer service or find the DNE option within your account before the expiration day cut-off. This is usually done if you prefer to let the option expire worthless or sell it for remaining extrinsic value, even if it's in-the-money.
How to know if I should sell my call option or exercise it?
Deciding whether to sell or exercise depends on your goals.
Sell: If the option still has significant extrinsic value (time value) and you want to maximize profit without owning the shares.
Exercise: If you want to own the underlying shares, or if the option is very close to expiration with little extrinsic value remaining, making exercising more efficient than selling.
How to check my Merrill Edge options trading approval level?
You can check your options trading approval level by logging into your Merrill Edge account and navigating to your profile or account settings. There should be a section detailing your trading permissions and approval levels for various investment products, including options. If you cannot find it, contact Merrill Edge customer service.
How to deposit funds into my Merrill Edge account to cover an exercise?
Merrill Edge offers several ways to deposit funds:
Electronic Funds Transfer (EFT): Link your bank account for easy transfers.
Wire Transfer: For faster, larger transfers.
Check Deposit: Mail a check or use their mobile check deposit feature.
Transfer from Bank of America: If you have linked Bank of America accounts, transfers can often be instant. Ensure funds settle before the exercise deadline.
How to find Merrill Edge's official documentation on options exercise and assignment practices?
You can usually find detailed documentation on Merrill Edge's website under their "Investor Education," "Help & Support," or "Legal & Regulatory" sections. Look for documents titled "Options Trading Disclosures," "Option Exercise & Assignment Practices," or similar. If you can't locate it online, contact their customer service for guidance.