How to Exercise a Call Option on Robinhood: A Step-by-Step Guide

As an options trader, you may be familiar with the concept of exercising your call option. Exercising your option gives you the right to buy the stock at a specified price, known as the strike price. In this article, we’ll break down the mechanics of exercising a call option on Robinhood and when it may be a good idea to do so.

What is Exercising a Call Option?

When you purchase a call option, you are buying the right to purchase a stock at a specific price, known as the strike price. Exercising your call option means you are using that right to actually buy the underlying stock at the strike price.

The Mechanics of Exercise and Assignment

When you exercise your call option, you are essentially converting your option contract into stock. For every call option you exercise, you will receive 100 shares of the underlying stock at the strike price. The cost of the stock will be determined by the strike price of the call option.

Once you exercise your call option, the person on the other side of the trade, who sold you the call option, will be assigned to sell you the stock. This process is known as exercise and assignment.

When to Exercise a Call Option?

Exercising a call option is not the usual route taken by most traders. Usually, traders open options positions with the intent to close them later for a profit, without exercising them.

However, there are some situations where exercising a call option may be a good idea:

• If you were assigned to the short leg of a spread.
• If you really want to buy the stock and can afford to do so.
• If the option you own is illiquid and the bid/ask spread is very wide.
• If you want to collect a dividend.

On the other hand, there are also situations where you may not want to exercise your call option:

• If long options are cheaper than long or short stock.
• If long options are lower risk compared to being long or short stocks.
• If you’re giving away money by exercising an option with any time value.
• If you’re giving away even more money by exercising an out-of-the-money option.

How to Exercise a Call Option on Robinhood?

Now that you know when you should and shouldn’t exercise your call option, here’s how to exercise a call option on Robinhood:

1. Open Robinhood and go to your positions screen by tapping the chart icon in the lower left.
2. Find the option contract you want to exercise and tap “Trade.”
3. Tap “Exercise” and follow the instructions.

It’s important to note that if your option is in the money at expiration, it will be exercised automatically, so make sure to check with your broker regarding automatic exercise policies.

Risks of Exercising a Call Option

While exercising a call option may be beneficial in certain situations, it’s important to understand the risks involved. When you exercise a call option, you are obligated to purchase the underlying stock at the strike price, regardless of the current market price. This means that if the stock price drops significantly after you exercise your option, you may be stuck with a loss.

Additionally, exercising a call option may trigger taxes and fees, so make sure to consult with your tax advisor before exercising your option.

The Step-by-Step Guide to Exercise Your Call Option on Robinhood

Now that you have a better understanding of the mechanics of exercise and assignment, let’s take a look at how you can exercise a call option on Robinhood. Robinhood makes the process of exercising your options very simple and straightforward. Here’s a step-by-step guide to walk you through the process:

1. Open your Robinhood app and log in to your account.
2. Go to your positions screen by tapping the chart icon in the lower left corner.
3. Find the call option that you want to exercise and tap on it.
4. Tap the “Exercise” button located at the bottom of the screen.
5. Review the details of the exercise, including the strike price and the number of shares you will receive.
6. Confirm the exercise by tapping the “Exercise” button again.
7. Wait for the exercise to be processed, and you will soon see the shares of stock in your account.

It’s important to note that when you exercise a call option, you will need to have enough buying power in your account to cover the cost of the shares of stock that you will receive. If you don’t have enough buying power, you may need to sell some of your existing positions or deposit additional funds into your account before exercising the option.

Conclusion | How to Exercise a Call Option on Robinhood?

In conclusion, exercising a call option on Robinhood is a relatively simple process, but it’s important to understand the mechanics of exercise and assignment before you do so. It’s also important to consider the potential risks and rewards of exercising your options and to have enough buying power in your account to cover the cost of the shares of stock that you will receive.

If you’re new to options trading, it’s a good idea to start with small trades and work your way up as you gain experience and confidence. Remember, options trading can be risky, so it’s important to educate yourself and understand the risks before you start trading.

If you have any questions or concerns about exercising call options on Robinhood, don’t hesitate to reach out to the customer support team for assistance.

FAQs | How to Exercise a Call Option on Robinhood?