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How to Realize the Value of an In-the-Money Call at Exercise

Article Quant Q&A · Author: stochazesthai
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Summary

The document explains ways to turn an in-the-money call option’s value into cash when exercising requires paying the strike price. Its example compares the strike payment with the difference between the stock price and strike, after accounting for the option premium. The answers suggest selling the option when it is sufficiently liquid, or using the proceeds from shorting the stock to fund exercise; borrowing against collateral is another possible bridge.

Key ideas

  • Selling a liquid call can realize its market value without funding exercise of the underlying shares.
  • A trader who exercises can offset the resulting long shares by shorting the stock, subject to practical execution and borrowing constraints.
  • Shorting the stock first can provide cash to pay the strike, leaving offsetting long and short stock positions.
  • Transaction costs and limited liquidity in both the option and stock can make realization harder.

Tags

OptionsEquitiesExecutionMarket microstructure
Full text
# buy asset after exercising call options


# buy asset after exercising call options












Suppose that I buy a call option at \$10 for a stock $S_0 = \$100$, $K = \$110$, expiry date $T$.

In $T$, $S_T = \$140$, so that I exercise the option to buy and then sell the assets (buy at $\$110$ and sell at $\$140$), thus obtaining a net profit equal to $\$140 - \$110 - \$10 = \$20$.

However, can I just directly take the profit or do I have to buy (at $\$110$) and then sell?

In other words, do I need the $\$110$ to obtain the $\$20$ profit? Or to directly take the profit should I buy a call option on the future of the asset (and thus exercise the call and then sell the future on the asset)?

## Answer by Bob Jansen (score 2, accepted)

https://quant.stackexchange.com/a/24532

I would just sell the option (assuming there is sufficient liquidity). As @noob2 correctly states there will be transaction costs but there is no way around that.

If both the option and the underlying are not liquid you might have a problem as there may be insufficient demand for either the option or the stock. In such a case it might be good to talk to a bank to see what's possible. Maybe you can buy the stock, create a hedge and borrow money with your position as a collateral to get cash and slowly decrease the long stock position.

## Answer by nbbo2 (score 2)

https://quant.stackexchange.com/a/24528

Usually the need to pay 110 in order to receive a stock worth 140 is not an obstacle in this kind of operation. There are some clever ways to get around it, as volcompt said. Or you can just borrow 110 against collateral for a few hours from your broker or from a friend and reimburse them immediately. So I wouldn't worry about it, it is a non issue.

## Answer by phdstudent (score 1)

https://quant.stackexchange.com/a/24525

You can start by shorting the stock at \$140, you get paid \$140. Then with that \$140 you pay the strike \$110, you get the share and you have a long position and a short position on a stock (which cancel out).

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.