You've been dabbling in options, and now you're at the exciting (and sometimes nerve-wracking) point of considering exercising them. Whether it's a long call that's deep in the money or a protective put that's doing its job, understanding how to exercise options at Charles Schwab is crucial. It's not just about hitting a button; it's about knowing when and why to do it, and what the implications are.
So, are you ready to take control of your options positions and potentially turn those contracts into actual shares (or cash)? Let's dive in!
The Power of Exercising Options: A Deeper Look
Before we jump into the "how-to," let's quickly recap why you might exercise an option.
- For Call Options (Long Calls): When you exercise a long call, you're buying 100 shares of the underlying stock at the strike price. This is advantageous if the market price of the stock is above your strike price, as you're buying it for less than its current value. You might do this if you want to:
- Acquire the shares for long-term holding.
- Immediately sell the shares in the open market for a profit (known as "cashless exercise," though Schwab's process might involve acquiring shares first then selling).
- Meet a short stock obligation.
- For Put Options (Long Puts): When you exercise a long put, you're selling 100 shares of the underlying stock at the strike price. This is beneficial if the market price of the stock is below your strike price, as you're selling it for more than its current value. You might do this if you:
- Want to protect gains on shares you already own (a "protective put").
- Anticipate a further decline in the stock and want to lock in a higher selling price for shares you'll acquire (or already hold short).
- Want to exit a long stock position at a favorable price.
It's vital to remember that each standard equity options contract represents 100 shares of the underlying stock. So, if you exercise one call option, you'll be buying 100 shares. If you exercise five put options, you'll be selling 500 shares.
Now, let's get to the nitty-gritty of exercising your options at Charles Schwab.
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| How To Exercise Options Charles Schwab |
Step 1: Confirm Your Options Approval Level and Account Status
Alright, before we even think about exercising, let's make sure your account is set up for it.
Sub-heading: Do You Have the Right Permissions?
Exercising options means you'll be dealing with the underlying stock, which requires specific trading privileges. If you don't have the appropriate options trading approval level, or if your account doesn't have margin enabled (which is often necessary for certain exercise scenarios, especially for short positions resulting from assignments), you might run into roadblocks.
- Action: Log in to your Charles Schwab account. Navigate to your "Profile" or "Account Services" section. Look for "Margin & Options" or similar. Here, you can verify your current options trading level. If you only have Level 0 (Covered Calls), you might need to apply for a higher level (like Level 1 or 2) to exercise long calls or puts, as this involves holding or taking on positions in the underlying security.
- Tip: If you need to upgrade your options level, Schwab usually has an online application process. Be prepared to provide details about your trading experience, financial situation, and investment objectives.
Sub-heading: Do You Have Sufficient Funds (or Shares)?
Tip: Don’t skim — absorb.
Exercising an option is not a "free" transaction. It involves a financial commitment related to the underlying shares.
- For Call Options: If you exercise a call, you're buying shares. This means you need enough cash in your account to cover the purchase of 100 shares per contract at the strike price. For example, if you exercise a call with a $50 strike price, you'll need $5,000 for one contract ($50 x 100 shares). If you don't have enough cash, you might face a margin call, or Schwab might, at its discretion, choose not to exercise the option (this is called a "do not exercise" or DNE request, and it's generally something you want to avoid if you intended to profit).
- For Put Options: If you exercise a put, you're selling shares. This means you need to already own 100 shares of the underlying stock per contract in your account that you are willing to sell at the strike price. If you don't own the shares, exercising the put would result in a short stock position, which requires a margin account and sufficient funds to cover the margin requirement. Short stock positions carry unlimited risk and are generally not recommended for new options traders.
Self-reflection moment: Take a moment to verify your available cash and/or shareholdings. This is a critical first check!
Step 2: Understand "In-the-Money" (ITM) vs. "Out-of-the-Money" (OTM)
The profitability of exercising an option hinges on its "moneyness."
Sub-heading: What Does "In-the-Money" Mean for You?
- For a Call Option: Your call option is "in-the-money" (ITM) if the current market price of the underlying stock is higher than your strike price. This is when exercising becomes profitable because you can buy the stock at a lower price and theoretically sell it immediately for a higher market price.
- For a Put Option: Your put option is "in-the-money" (ITM) if the current market price of the underlying stock is lower than your strike price. This is when exercising becomes profitable because you can sell the stock at a higher price than its current market value.
Sub-heading: Why "Out-of-the-Money" Matters
- For both Call and Put Options: If your option is "out-of-the-money" (OTM), meaning the market price is unfavorable compared to your strike price, exercising it would result in an immediate loss. For example, if you have a call option with a $100 strike, and the stock is trading at $95, exercising would mean buying shares at $100 that are only worth $95. In almost all cases, you would not want to exercise an OTM option. You would typically let it expire worthless or close the position.
Key takeaway: Focus on your ITM options for exercise consideration. OTM options are usually best left to expire or closed to salvage any remaining premium.
Step 3: Decide Between Exercising and Selling to Close
This is a crucial decision point, and often, selling to close is the preferred route.
Sub-heading: The Simplicity of Selling to Close
QuickTip: Read in order — context builds meaning.
For most retail traders, selling to close an in-the-money option is often more advantageous than exercising it. When you sell to close, you simply sell your option contract back into the market.
- Benefits of Selling to Close:
- Captures Extrinsic Value: Option premiums consist of intrinsic value (the ITM portion) and extrinsic value (time value and implied volatility). When you sell to close, you capture both. When you exercise, you only capture the intrinsic value, forfeiting any remaining extrinsic value. This can be significant, especially if there's still a lot of time left until expiration or if volatility is high.
- No Capital Commitment: You don't need to put up the capital to buy the shares (for a call) or already own the shares (for a put). This frees up your capital for other opportunities.
- No Transaction Fees for Exercise/Assignment: While Charles Schwab states there are no commissions or per-contract fees assessed on transactions resulting from options exercises and assignments,
there might still be standard stock trading commissions if you immediately sell the underlying stock after exercising. Selling to close an option online at Schwab incurs a $0 base commission plus a $0.65 per-contract fee (though this fee is sometimes waived for buy-to-close trades under a certain price). This needs to be weighed against the potential stock trading fees if you exercise and then sell. - Avoids "Pin Risk": This risk occurs near expiration when the stock price hovers very close to the strike price. After-hours price movements could cause an ITM option to become OTM (or vice-versa), leading to an undesirable exercise or assignment. Selling to close before expiration eliminates this risk.
When is exercising generally preferred?
- When you specifically want to acquire the underlying shares (for a long call) or dispose of shares you own (for a long put).
- When the extrinsic value of the option is very low, especially as expiration approaches. This is often the case for deeply in-the-money options close to expiry. In such scenarios, the difference between selling to close and exercising might be negligible, or exercising might even be slightly more efficient if you intend to hold the stock.
Step 4: How to Exercise Your Option at Charles Schwab
If you've weighed the pros and cons and decided that exercising is indeed the right move for your strategy, here's how to do it.
Sub-heading: Online Through thinkorswim (Recommended for Direct Exercise)
Charles Schwab's thinkorswim platform (which you gain access to as a Schwab client) offers the most direct and intuitive way to exercise options online. Many users report that this functionality became available more recently, and it's a significant improvement over having to call in.
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- Access thinkorswim: Log in to your Charles Schwab account and navigate to the thinkorswim platform (desktop, web, or mobile, though desktop often offers the most comprehensive features).
- Locate Your Position: Go to your "Monitor" tab, and then "Activity and Positions." Find the specific options contract you wish to exercise.
- Right-Click (Desktop) or Select (Mobile/Web):
- On thinkorswim Desktop: Right-click on the options position. A menu should appear. Look for an option like "Exercise" or "Exercise Option."
- On thinkorswim Web/Mobile: The interface might vary slightly, but generally, you'll need to select the option position to bring up more details and actions. Look for an "Exercise" button or menu item.
- Confirm Details: The platform will likely prompt you to confirm the details of the exercise: the underlying symbol, strike price, expiration, and the number of contracts you want to exercise. Double-check everything to ensure accuracy.
- Review and Submit: Once you've confirmed, review the order details, including any potential implications (like the capital required for a call exercise or the short position created by a put exercise without underlying shares). If everything looks correct, submit the exercise request.
Sub-heading: Via Phone Call to Charles Schwab (If Online Isn't Available or Preferred)
While online exercise via thinkorswim is becoming standard, if you encounter issues or prefer speaking to a representative, you can always call Schwab.
- Gather Your Information: Have your account number and the details of the option contract (underlying symbol, strike price, expiration date, number of contracts) ready.
- Call Charles Schwab: Dial Charles Schwab's customer service number. This can typically be found on their website under "Contact Us" or by logging into your account.
- Request to Exercise: Inform the representative that you wish to exercise your options contract. They will guide you through the process, confirm your identity, and verify the details of the exercise.
- Understand Implications: The representative will likely inform you of the capital requirements (for calls) or the need for sufficient shares (for puts), and confirm that you understand the consequences of the exercise.
Important Note: Exercise requests typically need to be submitted by a certain time on expiration day (usually 5:30 PM ET for equity options, but check specific times for individual contracts on the OCC website or Schwab's platform, as times can vary, especially for certain non-standard options). If you wait too long, you might not be able to exercise manually.
QuickTip: Pause before scrolling further.
Step 5: What Happens After You Exercise?
The exercise is complete, but the story isn't over yet!
Sub-heading: Settlement and Position Changes
- For a Call Option Exercise: If you exercised a long call, your account will now show a long position in the underlying stock. The shares will be purchased at your strike price. The transaction will typically settle in T+1 or T+2 days (Trade Date plus 1 or 2 business days), meaning the cash will be debited from your account and the shares will officially appear in your holdings after this period.
- For a Put Option Exercise: If you exercised a long put, your account will show that you have sold the underlying stock at your strike price. If you held the shares, they will be removed from your account, and the cash proceeds (strike price x 100 shares x number of contracts) will be credited to your account after settlement (T+1 or T+2). If you didn't hold the shares, you'll now have a short stock position (which means you've sold shares you don't own and will need to buy them back later to close the short position).
Sub-heading: Fees and Taxes
- Fees: As mentioned, Charles Schwab generally states that there are no commissions or per-contract fees assessed on transactions resulting from options exercises and assignments.
However, if you immediately sell the acquired stock (from a call exercise) or buy back the stock (to cover a short position from a put exercise without shares), standard stock trading commissions ($0 online for U.S. exchange-listed securities) would apply to those stock transactions. - Taxes: This is a complex area, and it's highly recommended to consult a tax professional.
- Generally, for long calls, there's no taxable event until you sell the acquired stock. Your cost basis for the stock will be your strike price plus the premium you paid for the option. The holding period for the stock begins on the day after you exercise.
- For long puts, if you exercise to sell stock you already own, the sale of the stock is a taxable event. The cost basis of the stock is reduced by the premium paid for the put.
- Different rules apply to different types of options (e.g., non-qualified stock options vs. incentive stock options) and how long you held the option.
Disclaimer: I am an AI and cannot provide tax advice. Always consult a qualified tax professional for personalized guidance regarding your specific situation.
Step 6: Monitor Your New Position
Whether you've acquired shares or sold them, your options journey has transitioned into a stock position.
Sub-heading: Manage Your Stock Holdings
- If you exercised a call and now own shares, you'll need to manage this new stock position. Decide if you want to hold it long-term, set stop-loss orders, or target a specific price to sell.
- If you exercised a put and created a short stock position (because you didn't own the shares), you now have unlimited upside risk. You will need to buy back those shares at a lower price to profit and close the short position. This is a very high-risk strategy if unintended.
Always be aware of your current holdings and the implications of any new positions created by exercising options.
Frequently Asked Questions (FAQs)
Here are 10 common "How to" questions related to exercising options at Charles Schwab, with quick answers:
Tip: Share this article if you find it helpful.
How to know if my option is In-the-Money (ITM) on Charles Schwab? You can typically see if an option is ITM on the options chain or within your "Positions" tab on Schwab.com or thinkorswim. For calls, the underlying stock price will be higher than the strike. For puts, the underlying stock price will be lower than the strike. Shaded areas on options chains often indicate ITM options.
How to avoid automatic exercise on Charles Schwab? If you hold an ITM option and do not want it to be automatically exercised at expiration, you must submit a "Do Not Exercise" (DNE) request to Charles Schwab by the expiration deadline (usually 5:30 PM ET on expiration day). Otherwise, ITM options are generally automatically exercised.
How to calculate the profit/loss from exercising an option at Charles Schwab? For a call: (Stock Sale Price - Strike Price) x 100 shares - Premium Paid. For a put: (Strike Price - Stock Purchase Price) x 100 shares - Premium Paid. Remember to account for any transaction fees if you sell the stock immediately after exercising a call, or buy to cover a short position after exercising a put.
How to exercise only a portion of my options contracts on Charles Schwab? When you initiate the exercise process (either online via thinkorswim or by phone), you will typically have the option to specify the number of contracts you wish to exercise. You don't have to exercise all of them.
How to manage margin calls after exercising a call option on Charles Schwab without enough cash? If you exercise a call option and don't have sufficient cash, Schwab may issue a margin call. You'll need to deposit additional funds, sell other securities in your account, or liquidate the newly acquired stock to meet the call. Schwab may, at its discretion, liquidate positions without prior notice to satisfy the margin call.
How to determine if selling to close is better than exercising my option on Charles Schwab? Generally, if your ITM option still has significant extrinsic value (time value or implied volatility remaining), selling to close will yield a higher profit. As expiration approaches and extrinsic value decays, exercising becomes more comparable or even slightly more efficient if you intend to hold the underlying stock.
How to tell what time options expire on Charles Schwab? Most standard equity options expire on the Saturday following the third Friday of the expiration month. However, trading typically ceases on the third Friday at 4:00 PM ET. Weekly and quarterly options can expire on other days (e.g., Monday, Wednesday, or other Fridays). Always check the specific expiration details for your contract on Schwab's platform or the Options Clearing Corporation (OCC) website.
How to handle a short option assignment on Charles Schwab? If you sold (wrote) an options contract and it gets assigned, you are obligated to fulfill the contract. For a short call, you must sell 100 shares at the strike price. For a short put, you must buy 100 shares at the strike price. Schwab will automatically handle the assignment, and your account will reflect the resulting stock position and cash flow. Ensure you have the shares (for a call) or cash (for a put) to cover the assignment, or be prepared for a short stock position or margin call.
How to view the tax implications of exercising options on Charles Schwab? Charles Schwab provides tax documents (like Form 1099-B) that summarize your trading activity, including options exercises and assignments. However, understanding the tax implications requires careful review and is best discussed with a qualified tax advisor, as it can be complex and depends on your specific circumstances and holding periods.
How to find my current options trading level on Charles Schwab? Log in to your Schwab account, go to "Profile" or "Account Services," and then look for "Margin & Options." Your approved options trading level will be listed there.
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