What Are Options Assignment and Exercise Fees?
Options are complex financial instruments, and understanding them fully can be challenging, especially for beginners. This article will explain what "exercise" and "assignment" mean in the context of options, as well as the fees associated with these processes.
What are options?
Firstly, let's define options. Stock options are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price before the contract expires. Most brokers offer options trading, but you should check whether your broker does and what fees they charge.
Here’s a quick example to explain options:
Imagine you're interested in ABCD Corporation, which is currently priced at $25 per share. You believe the price will rise, so you buy a call option for $150 to purchase 100 shares at $35 each, one month from now.
If the share price doesn’t reach $35 by the expiration date, you lose the $150 you paid for the option. But if the price exceeds $35, you can buy the shares at the lower price, potentially making a profit. For instance, if the share price reaches $45:
- You buy 100 shares at $35 each = $3,500 (strike price)
- The current market price is $45 per share x 100 = $4,500
- Your profit is $1,000 minus the $150 paid for the option
- Total net profit is $850
Options can provide significant profits from a relatively small investment. Now, let’s discuss "exercise" and "assignment."
Exercise and assignment
When an option is exercised, the buyer of a call option buys the stock, while the seller of a put option sells the stock. The Options Clearing Corporation (OCC) regulates these transactions in the U.S., ensuring that everything runs smoothly when options are exercised.
Assignment occurs when an option holder is required to fulfill the obligation of their contract, like selling shares at the agreed strike price.
Options assignments and exercises fees
Here's what you need to know about fees:
When you exercise an option, you decide to buy (or sell) the stock at the agreed price. Assignment happens when you're chosen to fulfill the opposite side of the option's contract, like providing the shares.
Historically, brokers charged fees for these services, but many now offer them for free as part of their move towards lower costs.
TradeStation, for example, charges $14.95 for both exercises and assignments. When choosing a broker, consider not just their fees but their overall services. Webull, for instance, offers commission-free options trading and excellent resources for investors.
Here’s a quick overview of standard options fees at some popular 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
Assignment and exercise fees are rare today, but you should still check with your broker about potential costs. Options trading can be risky, so it's important to understand all aspects before getting started.
What Are Options Assignment and Exercise Fees: Wrapping up
Options trading isn't for beginners. Make sure you fully understand how to trade options and any associated fees. Fortunately, fewer brokers charge these fees today, making options trading more accessible. However, always proceed with caution and consider all costs involved.
Updated on 7/22/2024.
|