Exercise
Exercise means to put into effect the right to buy or sell the underlying financial instrument specified in an options contract. In options trading, the holder of an option has the right, but not the obligation, to buy or sell the option's underlying security at a specified price on or before a specified date in the future.
Definition: Exercising a right refers to the act of buying or selling a specified underlying financial instrument according to the terms of an options contract. In options trading, the option holder has the right but not the obligation to buy or sell the underlying security at a specified price before a specified future date.
Origin: The history of options trading can be traced back to ancient Greece, but the development of the modern options market began with the establishment of the Chicago Board Options Exchange (CBOE) in 1973. Since then, options trading has become an integral part of financial markets, with the concept of exercising a right being central to options trading.
Categories and Characteristics: Exercising a right mainly falls into two categories: Call Options and Put Options. A Call Option gives the holder the right to buy the underlying asset at a specified price before a certain date, while a Put Option gives the holder the right to sell the underlying asset at a specified price before a certain date. The characteristics of exercising a right include: 1. Non-compulsory: The holder can choose whether to exercise the right; 2. Time sensitivity: The right must be exercised before the option's expiration date; 3. Price certainty: The exercise price is clearly specified in the options contract.
Specific Cases: Case 1: Suppose Investor A holds a Call Option for Apple Inc. stock with an exercise price of $150 and an expiration date of December 31, 2024. If the stock price rises to $160 before the expiration date, Investor A can choose to exercise the right to buy the stock at $150, thereby gaining a profit of $10 per share. Case 2: Investor B holds a Put Option for Tesla Inc. stock with an exercise price of $700 and an expiration date of December 31, 2024. If the stock price falls to $680 before the expiration date, Investor B can choose to exercise the right to sell the stock at $700, thereby avoiding a loss.
Common Questions: 1. Does exercising a right always result in a profit? Not necessarily; the profit from exercising a right depends on the difference between the market price of the underlying asset and the exercise price. 2. What happens if the right is not exercised before the option expires? If the right is not exercised before the option expires, the option will become void, and the holder will lose the right to exercise it.
