Options Trading Tutorial

what happens when the broker excercises a stock option settlement?

can someone explain what happens when a firm excercises some of your stock options on the saturday after expiration day and if you buy the stocks back on monday where would they go if the money to buy them leaves the account where are the stocks

Public Comments

1. After the expiration Friday of an option, ITS GONE. There is nothing left to exercise or trade.
2. From the wording of your question it is not clear if you are the holder (long) or the writer of (short) the options the options are calls or puts. If you are the holder of the option it is your decision if you want to exercise the option or not. If the option is in the money by at least one cent the Options Clearing Corporation (OCC) will assume that you want to exercise the option at expiration unless you give explicit instructions to let the option expire instead, otherwise the OCC will assume that you want to let the option expire unless you give explicit instructions to exercise the option. If you are the writer of the option neither you nor your broker decides if the option will be exercised or not. If the option is exercised the OCC will send an assignment notice to your brokerage who will in turn assign it to your account because of your short position. When the options is exercised at expiration one of the following will have happened before the market opens on Monday morning: (1) If it was a call option which you held, or if it was a put option you write, you will have bought the underlying stock for the strike price. If you had a short position in the stock the purchase covers the short position, otherwise it creates a long position in the stock. The cash to buy the stock is deducted from your account. If you have a cash (instead of margin) account and you do not have enough cash to pay for the stock you will be expected to deposit enough cash into the account before settlement. (2) If it was a put option which you held, or if it was a call option you wrote, you will have sold the underlying stock for the strike price. If you had a long position in the stock those shares will have been sold, otherwise it creates a short position in the stock. The cash from selling the stock is deposited in your account.