The exercise price is the price at which an underlying security can be bought or sold when trading a call or sell option. The exercise price is the same as the exercise price of a known option when an investor accepts a trade. An option receives its value from the difference between the fixed exercise price and the market price of the underlying security. The decision to exercise an option is not always clear. Several factors must be considered before the decision is made. However, in most cases, it is safer to keep or sell the option instead. To exercise an option, simply inform your broker that you wish to exercise the option in your contract. Your broker will make a exercise notification that will inform the seller or the author of the contract that you will exercise the option. The message is sent to the option seller through Options Clearing Corporation. The seller is required to fulfil the conditions of an option contract when the holder exercises the contract. Suppose Sam holds call options for Wells Fargo & Company (WFC) with an exercise price of 45 $US and the underlying stock is traded at 50 $US. This means that call options trade with $5 in cash. The exercise price is lower than the price at which the share is currently traded.

A common strategy among professional brokers is to sell large amounts of in-the-money calls just before an ex-dividend date. Often, sellers of non-professional options may not understand the benefit of early exercise of an appeal option and therefore unintentionally waive the value of the dividend. The professional trader can only be “affected” for a part of the calls and therefore benefits from a dividend on the share used to cover the un exercised calls. An option agreement defines the nature and quantity of shares to be issued to the buyer, the exercise period, the exercise price and all the conditions that must be met before they can be exercised. The holder of an option contract has the right to exercise it and to demand that the financial transaction defined in the contract be carried out immediately between the two parties, which will result in the termination of the option contract. When exercising a call option, the option holder acquires the underlying shares (or commodities, fixed income securities, etc.) from the option seller at the exercise price, while, in the case of a set option, the option owner sells the underlying to the option seller, in turn at the exercise price. [1] If Wells Fargo trades at 50$US and the exercise price of its call option is 55$US, that option is no longer in the money. It would not be advantageous for Sam to exercise this option as there is no need to pay $55 (with the option) if he can buy the stock currently for $50…