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When exercising a leap call option, do you keep the premium?

Personal Finance & Money Asked by Irakli Lekishvili on February 23, 2021

let’s say that 1 stock of XYZ currently is 50$.

I bought leap call option for XYZ with strike price 50$ and premium 10$. When exp date will come and I will exercise my call option. How much will I pay for single stock, if XYZ current price is already 100$?

Current price-strike price-premium. 100-50-10=40$

or

Current Price-premium? 100-50=40$?

3 Answers

You usually don't keep the time value portion of the call. If you exercise it, it has to be 'in the money' and the shares will be transferred to your account by your broker at the strike price. So if the stock is trading at 100$ and the call was written for 50$ and you exercise it the stock will transfer to your account and either you or your broker will sell it if you want to profit. Or you could just keep the stock (but probably a good idea to sell it if your up 200%). So if you paid 10$ for the call you lose that. So you'd be up 40$ a share.

Answered by Voltage Spike on February 23, 2021

10$. When exp date will come and I will exercise my call option. How much will I pay for single stock, if XYZ current price is already 100$?

The current price is absolutely irrelevant - IF you exercise the option (which you can also do when it would result in a loss, i.e. the stock price trades lower than the strike - you get the stock option AT THE PRICE OF THE STRIKE. There is no bonus for a premium still there, the price is literally what it says on the option.

You will pay 50$ per share for a share, and the current value will be 100$.

Answered by TomTom on February 23, 2021

A standard option contract (unadjusted) is for 100 shares not "1 stock".

When you exercise an option, the premium becomes irrelevant other than for determining your cost basis.

If the strike price of your call is $50 and the call costs $10, you will pay $50 per share for the stock and your net cost basis per share will be $40 ($50 - $10).

Note that unless you want to own the stock, it is usually better to sell the call to close, especially if there is time premium remaining.

Answered by Bob Baerker on February 23, 2021

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