You've bought a call option on Charles Schwab, and now it's "in the money" – meaning the stock price is above your strike price. Exciting! But what do you do next? Unlike simply selling the option for a profit, exercising it means you actually take ownership of the underlying shares. This guide will walk you through the process step-by-step, explaining the nuances and considerations at each turn.
Understanding Your Call Option
Before we dive into the "how-to," let's quickly recap what a call option gives you:
- The Right, Not the Obligation: You have the right to buy the underlying stock at a specific price (the strike price) before or on a certain date (the expiration date). You are not obligated to do so.
- 100 Shares per Contract: Each standard options contract typically represents 100 shares of the underlying stock. So, if you bought one call option, exercising it means you'll buy 100 shares.
- In-the-Money (ITM): For a call option, it's considered in-the-money when the current market price of the underlying stock is higher than your option's strike price. This is generally when you'd consider exercising it.
Why Exercise a Call Option?
While often it's more profitable to simply sell your in-the-money call option, there are specific reasons you might choose to exercise:
- You want to own the shares: Perhaps you believe the stock has significant long-term potential and you want to add it to your portfolio.
- To collect dividends: If a dividend payment is approaching, and you want to be a shareholder of record to receive it, exercising before the ex-dividend date might be a consideration. (However, be aware of the impact of the dividend on the stock price and option value).
- Specific trading strategies: In some advanced options strategies, exercising one leg of a spread might be necessary to achieve your overall objective.
Important Note: Exercising an option involves buying the underlying stock, which requires sufficient capital in your account to cover the purchase. Make sure you have the necessary funds (cash or margin) before proceeding.
Step 1: Confirm Your Intent and Account Readiness
Alright, first things first! Are you absolutely sure you want to own the shares, or would selling the option be a better move for your financial goals? This is the most crucial decision.
Sub-heading: Assess Your Financial Goals and Market Outlook
Before you click "Exercise," take a moment to consider:
- Do you have the capital? Exercising means buying shares. Do you have enough cash in your Schwab account, or are you approved for margin and comfortable using it?
- What are your long-term plans for the stock? Are you planning to hold it for growth, or will you sell it soon after exercising? If you're selling immediately, consider the commissions and fees involved, as well as the tax implications.
- Is the option deep in-the-money? The deeper in-the-money your option is, the more likely exercising it makes sense from a profit perspective, if your goal is to own the stock. If it's barely in the money, selling the option might still yield a better return due to time value.
Sub-heading: Verify Options Approval Level
To exercise a call option and take delivery of shares, you generally need to have the appropriate options trading approval level with Charles Schwab. If you were able to buy the call option, you likely have at least the basic approval needed. However, it's always good to double-check:
- Log in to your Charles Schwab account.
- Navigate to your Profile or Account Settings.
- Look for a section related to Margin & Options or Trading Privileges.
- Confirm your current options approval level. If you're unsure, or if you only have a very basic level (e.g., Level 0 for covered calls only), you might need to apply for an upgrade before exercising.
Step 2: Access Your Options Position on Schwab.com or thinkorswim
Now that you're mentally prepared and financially ready, let's locate that winning call option! Charles Schwab offers multiple platforms, but the most common for individual investors are their main website (Schwab.com) and the thinkorswim platform (if you have access).
Sub-heading: Exercising via Schwab.com (Recommended for Simplicity)
This is generally the most straightforward method for exercising a standard call option.
- Log in to Schwab.com.
- From your account summary, navigate to your Positions tab or section. This is where all your holdings are listed.
- Scroll down and locate the specific call option you wish to exercise. It will typically be listed under the "Options" section of your holdings.
- Next to the option contract, you should see an action menu or a "Trade" or "Manage" button. Click on this button.
- Look for an option like "Exercise" or "Exercise Options." Charles Schwab's interface is designed to be intuitive, so this should be clearly visible.
Sub-heading: Exercising via thinkorswim (Advanced Traders)
If you're an active trader and use the thinkorswim platform, you can also exercise your option there. The exact steps might vary slightly between the desktop, web, and mobile versions, but the general flow is similar:
- Open and log in to your thinkorswim platform.
- Go to the Monitor tab.
- In the "Activity and Positions" section, find your Options contracts.
- Right-click on the specific call option you want to exercise.
- A contextual menu will appear. Select "Exercise" from the options.
Step 3: Configure Your Exercise Order
Once you've initiated the exercise process, you'll be presented with an order entry screen or a pop-up window to confirm the details. Pay close attention to every field here.
Sub-heading: Selecting the Underlying Symbol and Strategy
- Symbol Confirmation: The stock symbol for your underlying asset should already be pre-filled based on the option you selected. Double-check that it's correct.
- Strategy: You'll typically have an option to select your "Strategy." For exercising a long call, you'll select "Exercise Options."
Sub-heading: Choosing the Exercise Type
This is a critical decision. Charles Schwab often provides choices on how you want to handle the shares once you've exercised the option:
- Hold: This is the most common choice. You exercise the option, and the underlying shares are deposited directly into your Schwab brokerage account. You now own the shares.
- Sell: In some cases, especially with employee stock options, you might have the option to "Sell" immediately upon exercise. This means the shares are bought and then immediately sold, and you receive the cash profit (minus strike price and any fees/taxes). Be aware of tax implications if you choose this.
- Sell & Hold (Combination): This allows you to sell a portion of the shares to cover the cost of exercising the remaining shares, and you then hold the rest. This can be useful for managing cash flow.
Choose the option that aligns with your financial goal!
Sub-heading: Specifying the Number of Contracts
- Quantity: Enter the number of options contracts you wish to exercise. Remember, each contract represents 100 shares. If you own 5 contracts and want to exercise all of them, you'd enter "5."
Sub-heading: Order Type for the Underlying Stock (if applicable)
If you chose to Sell or Sell & Hold, you might be prompted to select an order type for the immediate sale of the shares:
- Market Order: Your order to sell the shares will execute immediately at the best available market price. This offers speed but no price guarantee.
- Limit Order: You set a specific price at which you're willing to sell the shares. Your order will only execute if the market price reaches your specified limit or better. This provides price control but no guarantee of execution.
For a direct exercise and hold, this step typically isn't presented, as you're simply acquiring the shares at the strike price.
Step 4: Review and Confirm Your Order
You're almost there! Before you finalize, Schwab will provide a detailed summary of your exercise request.
Sub-heading: Scrutinize the Details
- Verify the Stock Symbol: Ensure it's the correct company.
- Confirm Strike Price: Make sure the strike price listed matches your option contract.
- Check Number of Shares: Confirm you're exercising the correct number of contracts, translating to the right number of shares (e.g., 5 contracts = 500 shares).
- Review Total Cost: The system will calculate the total cost of purchasing the shares (Number of Contracts * 100 * Strike Price), plus any associated commissions or fees. Ensure you have enough funds or margin available.
- Examine Tax Implications: While Schwab won't provide tax advice, they might offer a disclaimer or link to resources about potential tax consequences. It's highly recommended to consult a tax professional regarding options exercises.
Sub-heading: Acknowledge Disclosures and Submit
- Read Disclosures: Charles Schwab, like all brokers, will require you to read and acknowledge various disclosures related to options trading and the exercise process. Do not skip these.
- Final Confirmation: Once you've reviewed everything and are satisfied, click the "Submit," "Place Order," or "Confirm" button.
Step 5: Post-Exercise: What Happens Next?
Congratulations, you've successfully exercised your call option! But the process isn't immediately finished.
Sub-heading: Settlement and Ownership
- Trade Confirmation: You will receive a trade confirmation from Charles Schwab detailing your exercise.
- Settlement: The shares will typically settle in your account within two business days (T+2). This means that while you've initiated the purchase, the actual shares won't appear in your portfolio until the settlement date.
- Account Update: Once settled, the newly acquired shares will appear in your Charles Schwab brokerage account, and your option position will be closed.
Sub-heading: Tax Implications and Record Keeping
- Cost Basis: Your cost basis for the newly acquired shares will be your option's strike price plus any premium you paid for the option (and any commissions/fees related to the purchase and exercise). It's crucial to keep accurate records for tax purposes.
- Future Sale: When you eventually sell these shares, the profit or loss will be calculated based on this adjusted cost basis. The holding period for determining short-term vs. long-term capital gains/losses begins on the day after the option was exercised.
Frequently Asked Questions (FAQs)
How to check my options approval level on Charles Schwab?
You can typically check your options approval level by logging into Schwab.com, navigating to your "Profile" or "Account Settings," and looking for a section like "Margin & Options" or "Trading Privileges."
How to find my call option contracts on Charles Schwab?
After logging into Schwab.com, go to your "Positions" tab or section, where all your investments are listed. Your call option contracts will typically be under the "Options" section.
How to decide if I should exercise or sell my call option?
Decide based on whether you want to own the underlying stock long-term, your cash availability to buy the shares, and a comparison of the profit from selling the option versus exercising and then potentially selling the stock later (considering commissions and taxes). Often, selling the option is more efficient due to remaining time value.
How to calculate the cost of exercising a call option?
The cost of exercising is calculated as: (Number of Contracts * 100 * Strike Price) + any commissions/fees.
How to handle taxes after exercising a call option?
Gains from exercising a call option are generally not taxed until you sell the underlying stock. Your cost basis for the stock will be the strike price plus the premium paid for the option. Consult a tax professional for personalized advice.
How to exercise a call option if it's near expiration?
If your call option is in-the-money and near expiration, you'll need to decide whether to exercise or sell it before the expiration date/time. Charles Schwab may automatically exercise in-the-money options at expiration (known as "auto-exercise"), but it's best to take action yourself to ensure your desired outcome.
How to avoid automatic exercise of an in-the-money call option?
If you don't want to exercise an in-the-money call option, you must sell it or close your position before the expiration time on the expiration date. Otherwise, your broker may automatically exercise it on your behalf.
How to contact Charles Schwab's Trade Desk for options questions?
You can contact Charles Schwab's Trade Desk for options support and inquiries. They typically offer phone support (e.g., 800-435-9050 or 888-245-6864) and sometimes in-platform chat on thinkorswim. Check their "Contact Us" or "Support" pages on Schwab.com for the most current contact information.
How to ensure I have enough money to exercise my call option?
Before attempting to exercise, check your available cash balance and margin buying power in your Schwab account. If you plan to use margin, ensure you understand the associated risks and requirements.
How to reverse an exercised call option?
Once a call option is exercised and the shares are acquired, it generally cannot be "reversed" in the same way you might cancel an unexecuted trade. You would have to sell the acquired shares in the market, which would be a new transaction with its own market price and potential gains/losses.
