Oapter 1: Definitions 17 
the difference between the current price of XYZ and the delivery price of $45 
per share. If he goes short to honor the assignment, then he has to fully margin 
the short sale at the current rate for stock sold short on a margin basis. 
AFTER EXERCISING THE OPTION 
The OCC and the customer exercising the option are not concerned with the actual 
method in which the delivery is handled by the assigned customer. They want only to 
ensure that the 100 shares of XYZ at 45 are, in fact, delivered. The holder who exer­
cised the call can keep the stock in his account if he wants to, but he has to margin it 
fully or pay cash in a cash account. On the other hand, he may want to sell the stock 
immediately in the open market, presumably at a higher price than 45. If he has an 
established margin account, he may sell right away without putting out any money. If 
he exercises in a cash account, however, the stock must be paid for in full - even if it 
is subsequently sold on the same day. Alternatively, he may use the delivered stock to 
cover a short sale in his own account if he happens to be short XYZ stock. 
COMMISSIONS 
Both the buyer of the stock via the exercise and the seller of the stock via the assign­
ment are charged a full stock commission on 100 shares, unless a special agreement 
exists between the customer and the brokerage firm. Generally, option holders incur 
higher commission costs through assignment than they do selling the option in the 
secondary market. So the public customer who holds an option is better off selling the 
option in the secondary market than exercising the call. 
Example: XYZ is $55 per share. A public customer owns the XYZ January 45 call 
option. He realizes that exercising the call, buying XYZ at 45, and then immediately 
selling it at 55 in the stock market would net a profit of 10 points - or $1,000. 
However, the combined stock commissions on both the purchase at 45 and the sale 
at 55 might easily exceed $100. The net gain would actually be only $900. 
On the other hand, the XYZ January 45 call is worth (and it would normally sell 
for) at least 10 points in the listed options market. The commission for selling one call 
at a price of 10 is roughly $30. The customer therefore decides to sell his XYZ 
January 45 call in the option market. He receives $1,000 (10 points) for the call and 
pays only $30 in commissions - for a net of $970. The benefit of his decision is obvi­
ous. 
Of course, sometimes a customer wants to own XYZ stock at $45 per share, 
despite the stock commissions. Perhaps the stock is an attractive addition that will