How to calculate the amount of funds required to exercise an option

For instance, a user holds an option position AAPL on December 17, 2022, 150 Call, and there are no other positions or excessive cash. On the expiration date, the underlying price of AAPL is $200. If the option has no time value, value of the user's existing option holding is: (current price-exercise price)*contract size*number of positions = (200 - 150)*100*1 = $5,000. The user's Equity Loan Value (ELV)=Initial Margin (IM) requirement =$5,000, where all of the ELV comes from the option holding.

Exercising this in-the-money option at expiration means that the value of the option goes to zero, and accordingly a position of the underlying stock is opened at the exercise price.

In the above example, the option value of $5,000 goes to zero, and 100 shares of AAPL are bought at a price of $150 per share. Therefore:

The purchase price of the underlying shares is $150*100=$15,000. Since the market price of those shares is $200*100 =$20,000, the account will have an ELV balance of 20,000 -15,000 = $5,000, which remains unchanged before and after the exercise.

The IM requirement has changed from $5,000 for a single option to the IM requirement for 100 shares of the underlying stock, which is 20,000*50%=10,000 (assuming the stock margin requirement is 50%).

As a result of this increase in the margin requirement, the account is deemed to have "insufficient" balance needed for the exercise. Therefore, the user needs to make up the difference here which is 10,000-5,000=$5,000 in order to ensure a successful option exercise. 

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