What is “Exercising An Option”?
Exercising an option is the act of converting it into a futures contract. Only the buyer of an option, whether it is a put or a call, can exercise an option. Remember, an option buyer pays a premium for the right to be long or short a futures contract. The only time that a grain producer will exercise an option is when the option has gained in value, is profitable and due to expire. If the producer continues to need protection for the grain, the option can be exercised and converted into a futures position. This is done by notifying the broker. When the broker receives the notice, the Clearing Corporation is informed and creates a new futures position at the strike price for the option buyer. This is just part of the process involved in forming the best grain futures strategy.