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I got really lucky and out-kicked my coverage on this one... my standard MO is to buy a call that has a long target date (well over a year out) and sell or roll it for a modest profit near expiration... I have never exercised one and bought the stock. But what happens if the option is SO far in the money that it is worth 2 to 3 times capital required to exercise the option? Does the capital gain transfer to the stock?

Let's say I bought a January 2021 call for $12 ($1,200 invested) for a stock with a strike price of $115. And let's say that stock is now trading north of $450. The capital required to exercise the option and buy 100 shares is $11,500, but the call is currently trading over $350, so the value of the option is over $35,000. If I exercise the option, what happens to the $32,000+ gain? What happens to the initial $1,200? Do I only need $10,300? Trying to mitigate (or defer) the LT Cap Gains...
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Hi jpfooligan --

Congratulations!

Let's say I bought a January 2021 call for $12 ($1,200 invested) for a stock with a strike price of $115. And let's say that stock is now trading north of $450. The capital required to exercise the option and buy 100 shares is $11,500, but the call is currently trading over $350, so the value of the option is over $35,000. If I exercise the option, what happens to the $32,000+ gain? What happens to the initial $1,200? Do I only need $10,300? Trying to mitigate (or defer) the LT Cap Gains...

If you exercise the option and buy the shares, you will pay another $11,500 on top of the $1,200 you've already paid, for a total investment of $12,700. That $12,700 becomes your basis in the stock. Your holding period as a shareholder for those shares is treated as if you bought on the day you exercised the options to buy the shares, so you'd have to hold for over a year from that point for any gains to be considered long term.

Regards,
-Chuck
Discovery/HR Home Fool
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