Exercise or sell your option: which puts more in your pocket?
Selling an in-the-money option usually nets more than exercising it, because the sale price includes the time value that exercising throws away. Exercising also needs the cash for 100 shares. Compare the bid to the intrinsic value and you have your answer.
The short answer
Sell the option when its bid is higher than its intrinsic value. That's almost always true while there is time left, so selling usually nets more.
Exercise only when the bid is below intrinsic value, or when you want the shares and have the cash to pay for them. One more case: a call deep in the money just before a dividend, where the dividend is worth more than the time value left.
Two words first. Intrinsic value is what the option is worth if it were used right now: for a call, the stock price minus the strike. Extrinsic value is everything above that, the part people pay for time and possibility. Exercising keeps the first and throws the second away. Selling keeps both.
Side by side
| Sell the option | Exercise the option | |
|---|---|---|
| What you get | The bid price, in cash | 100 shares at the strike (call) |
| Cash needed | None | Strike × 100 for a call |
| Keeps time value? | Yes | No, it's gone |
| After the trade | You're flat | You own shares and carry their risk |
| Fees | One option trade | An exercise fee at some brokers, then a stock trade if you sell |
| Usually better when | There is time left | The bid is below intrinsic, or a dividend is due on a deep call |
A worked example (hypothetical)
You bought one $50 call on a made-up stock, Maple Robotics, for $3.00 ($300). The stock is now $56. Three weeks remain.
- Intrinsic value: $56 − $50 = $6.00.
- The call quotes $6.20 bid, $6.40 ask.
- The stock's bid is $55.98.
| Choice | Cash out | Cash in | Net on the trade | vs selling |
|---|---|---|---|---|
| Sell the call at the bid | $0 | $620 | $620 − $300 = +$320 | — |
| Exercise, then sell the shares | $5,000 | $5,598 | $598 − $300 = +$298 | −$22 |
| Exercise and keep the shares | $5,000 | Shares worth about $5,600 | Your cost is $53 a share | You now carry the stock |
Selling wins by $22, and you never had to find $5,000. The $0.20 of time value in the bid is money exercising throws away. If your broker charges to exercise, the gap is wider.
The third row is not a win either. You turned a $300 bet into $5,000 of stock. If the stock falls to $50, the shares lose $600 and you're $300 behind your starting point.
The two times exercising wins
1. The bid sits below intrinsic value. Deep in-the-money options can trade on a wide, thin market. Say you own a $40 call with the stock at $56. Intrinsic value is $16.00, but the best bid is $15.90.
- Sell the call: $1,590.
- Exercise and sell the shares: $5,598 − $4,000 = $1,598.
Exercising nets $8 more, if you have the $4,000 and the stock fills where you expect. Close enough that the cash and the fill risk often decide it.
2. A dividend is coming on a deep call. The day before the Ex-dividend date, a call holder who exercises gets the shares in time for the dividend. If the dividend is bigger than the time value left in the call, exercising can come out ahead. This is also why covered call sellers sometimes get assigned early. See early assignment on a covered call.
Which should you do?
| Sell if… | Exercise if… |
|---|---|
| The bid is above intrinsic value | The bid is below intrinsic value |
| You don't have the cash for 100 shares | You want the shares and have the cash |
| You just want the profit or the loss closed | A dividend beats the time value left |
| Time is left before expiry | It's expiry day and the spread is too wide to sell |
On expiry day, an option in the money by a cent or more is usually exercised for you. If you don't want shares, sell before the close or send a do-not-exercise instruction; see automatic exercise vs do not exercise.
If you sell options instead of buying them, this is the other side of your trade. Holders sell far more often than they exercise early, which is why early Assignment is less common than people fear. More on how that fits the wheel strategy, and every strategy side by side, in the options strategy comparison chart.
Questions
Is it better to exercise a call option or sell it?
Usually sell. The sale price includes time value that exercising throws away, and selling needs no cash. Exercise makes sense when the bid is below intrinsic value or a dividend is worth more than the time value left.
How much money do I need to exercise a call?
The strike price times 100 for each contract. A $50 call needs $5,000 to exercise. Without that cash, your broker may refuse or sell the shares for you.
Do I make more money if I exercise my option?
Rarely. If you exercise and then sell the shares, you get only the intrinsic value. Selling the option gets you the intrinsic value plus whatever time value is still in the bid.
What happens if I don't sell or exercise before expiration?
If the option is in the money by a cent or more, it's usually exercised for you. If it's out of the money, it expires worthless. Check your broker's expiration rules.
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