Help me understand Stock Options


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I've been investing regularly for a while now,  and have made a pretty decent profit (nothing crazy, but ~10-12% returns, with a few exceptions for Yahoo and Tesla stock).  But I've wanted to get into Options trading to exercise other options (no pun intended) for investing.

 

As I understand it, Options are a contract giving you the right to buy a stock at a certain price, in batches of 100 (1 option contract = 100 shares), assuming you purchase a call.  The option is worthless, until the strike price has been met or exceeded, at which point you can either "exercise" your options, or sell it.  This confuses me though, so I'll give an example.

 

I recently purchased 40 options (4000 shares) of Sirius XM stock at $0.16/share, for a total of ~640$ (+comission). The strike price is $3.50 for an august 13th date.  What I don't quite understand, is what to do with the options if the price hits 3.50 before or on august 13th.

 

"Having the right to purchase";  does this mean I can outright buy those 4000 shares @ 3.50$ each? I of course don't have 12000$ lying around to do so.

"Exercise your options"  So say the price hits 4$ before the 13th, and I want to sell my options.   Would I place a "put" order to sell the 4000 shares, or would I sell it like normal stock?  I've figured out buying calls, but i am not sure what to do with it when I wish to sell them, assuming the strike price is met on or before the target date.  

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I think i may have answered my own question...found this on fidelity:

 

Initiate an Exercise-and-Hold Transaction (cash-for-stock)

Exercise your stock options to buy shares of your company stock and then hold the stock. Depending on the type of the option, you may need to deposit cash or borrow on margin using other securities in your Fidelity Account as collateral to pay the option cost, brokerage commissions and any fees and taxes (if you are approved for margin).

The advantages of this approach are:

  • benefits of stock ownership in your company, (including any dividends)
  • potential appreciation of the price of your company's common stock.

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Initiate an Exercise-and-Sell-to-Cover Transaction

Exercise your stock options to buy shares of your company stock, then sell just enough of the company shares (at the same time) to cover the stock option cost, taxes, and brokerage commissions and fees. The proceeds you receive from an exercise-and-sell-to-cover transaction will be shares of stock. You may receive a residual amount in cash.

The advantages of this approach are:

  • benefits of stock ownership in your company, (including any dividends)
  • potential appreciation of the price of your company's common stock.
  • the ability to cover the stock option cost, taxes and brokerage commissions and any fees with proceeds from the sale.

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Initiate an Exercise-and-Sell Transaction (cashless)

With this transaction, which is only available from Fidelity if your stock option plan is managed by Fidelity, you may exercise your stock option to buy your company stock and sell the acquired shares at the same time without using your own cash.

The proceeds you receive from an exercise-and-sell transaction are equal to the fair market value of the stock minus the grant price and required tax withholding and brokerage commission and any fees (your gain).

 

 

 

So since I don't have 12k, and don't want to necessarily use margin to buy these, I'd excercise the 3rd option to turn and sell the options to pocket the profit.

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