What Are Options Assignment and Exercise Fees?
Stock options are a bit complicated, especially if they’re a new concept to you. This article will focus on two aspects of options known as “exercise” and “assignment,” as well as the fees associated with them. So, read on to learn everything you need to know about options assignment and exercise fees.
What are options?
Let’s start with the basics of options. Stock options are contracts that allow buyers to buy or sell an underlying asset. These contracts have specific expiration dates, at which point the buyer must exercise their option. Most brokers offer options trading, although if you’re interested in options trading and looking for a broker you’ll want to verify that (as well as their fees for options trading—more on that below).
Here’s an example to help make options contracts more concrete:
Let’s say you want to trade ABCD Corporation (ABCD). ABCD is currently at $25 per share, and you think it will increase. So, you purchase a call option for $150 for 100 shares with a strike price of $35 for one month from now.
At worst, if the shares don’t rise to the option strike price at the expiration date, the investor will be out the $150 paid for the option. However, if the shares do rise to (or exceed) the strike price, then the trader will make a profit. The profit is the difference between the market price and the strike price, multiplied by the incremental value of the underlying asset and, finally, minus the price paid for the option.
So, for the above example, it would work like this if the shares were to rise to $35:
$25 per share x 100 = $2,500 (market price)
Shares sold for $35 x 100 = $3,500 (strike price)
Profit equals $1,000
Subtract the $150 paid for the option
Total net profit equals $850
As you can see, options trading, when it goes well, can be quite lucrative, as this is an $850 profit on a mere $150 invested. Now let’s focus on what’s known as “exercise” and “assignment.”
Exercise and assignment
When an option is exercised, this means that the call holder buys the stock, while the put holder sells the stock. Options Clearing Corporation (OCC) is a central clearinghouse and regulator for options traded in the U.S. and is regulated by the SEC. When options are exercised, it is the OCC’s job to decide which brokerage firm will be assigned the exercise. In turn, the broker will decide which customer gets the assignment.
So, when an exercise is assigned, it means you are required to sell your shares. This is referred to as having shares called out or away.
Now let’s look at the fees associated with exercise and assignment.
Options assignments and exercises fees
So, let’s do a quick recap.
As we’ve seen, when you trade options you earn the right to purchase an underlying stock on or before the expiration date at the designated strike price.
When you exercise this right and buy the stock at said price, it’s referred to as exercise. When the options contract is ordered by the clearing house to purchase or sell the underlying stock from the option holder, this is called assignment. In both cases, some brokers will charge fees.
Nowadays, however, not all that many brokers still charge assignments and exercise fees. This is part of an overall movement toward low-cost or no-cost discount brokers.
One big exception is TradeStation, who charges $14.95 for both options exercise and assignment. Ultimately, you may want to choose your broker based not only on their options fees but also their overall functionality. For example, Webull has zero commission for options trades and offers very good resources for investors.
Here is a breakdown of standard options fees per trade and contract for some common brokers:
E*Trade - $0 per options trade, $0.65 per contract
Interactive Brokers - $0 per options trade, $0.25-$0.65 per contract
TastyTrade - $0 per options trade, $1 per contract (opening trades only)
Charles Schwab - $0 per options trade, $0.65 per contract
Webull - $0 per options trade, $0 per contract
As for assignment and exercise fees, these aren’t common anymore, but if you’re interested in options trading you should still research the brokers you’re interested in to ensure that you know what you’re getting into in terms of potential fees.
What Are Options Assignment and Exercise Fees: Wrapping up
Options trading is not for beginning investors, so do your due diligence and ensure that you understand the ins and outs of making these kinds of trades. If you’re looking for a broker to do options trading, you may want to research their exercise and assignment fees. Luckily, though, few brokers still charge these fees. Plus, you have brokers such as Robinhood who don’t even have per-contract fees. All of this is making options trading more accessible to the average investor, though you should still proceed with caution.
|