If your call option expires in-the-money, it means the option’s strike price is lower than the market price of the underlying asset, thus making it profitable to exercise. Normally, exercising a call option results in purchasing the underlying stock at the option’s strike price. However, if you do not have sufficient funds to buy the shares outright, options vary depending on your broker and the specific options agreement you have in place.
Generally, three scenarios can occur:
Automatic Exercise: Many brokerages have policies to automatically exercise in-the-money options at expiration. If this happens and you lack sufficient funds, the brokerage might facilitate a cash-settled option contract by selling the shares immediately after purchasing them, allowing you to realize any remaining profit without maintaining the position. However, fees and taxes may apply.
Assignment: If your option is automatically exercised, but you lack the funds, the broker might assign the contract to another trader who has enough funds. This generally requires broker intervention and may involve transaction fees.
Manual Liquidation: To preclude the need to exercise the option if you can’t afford to buy the underlying stock, you might choose to sell the option contract before expiration. Selling closes out your position and locks in any profits or losses without the requirement of purchasing shares.
Contact your broker well in advance of expiration to understand their specific policies and any potential fees or risks involved.
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