So let's say you bought 5 call options to purchase a stock at $7. The stock price later increases to $10/share. If you want to execute all 5 call options then you'd need to pay $3500 (500 shares at $7 plus any commission).
You could then sell the 500 shares on the open market for $5000 (500 shares at $10 plus any commissions). So in the end you'd make approximately $1500 profit.
That's not how stock options work. If your option price is $1, that means you pay $1 for the stock. If you sell it at $7 then you make a $6 profit; if you sell it at $10 then you make a $9 profit.
You can't make a profit without buying and selling, and stock options themselves usually cannot be sold.
The value of your options increase depending on its delta, and are affected by its daily theta. You can sell the contracts by themselves to take in the gain accrued from those contracts themselves.
However, even if your strike price is $7, and the stock is now at $10, it does not mean you earned $3 x 500. The value of your options increase differently. You only gain off the value of your contracts, not the stock.
Generally, most options traders just sell the contracts, since that's much easier to deal with, but if you want to sell the shares, you need to exercise those contracts.
Exercising your options means you must pay $7 x 100 per contract to convert them to stock. Each options contract equates to 100 shares of the company. That means, if you have 500 contracts, you would have to pay for 500 x $7 x 100 to get 50,000 shares, which is probably not what you're looking to do.
Supposing you did want to exercise your options to convert it into stock, and then sell it: If you were looking to gain $1,500, you would need to have 5 contracts. 5 contracts = 500 shares.
$7 x 100 x 5 = $3,500 required (+ commissions and the exercise fee). This would give you 500 shares of the company, which you can sell normally, at $10, for $1,500 profit, subtract yet another sell commission.
To keep it short: Options exercising is mostly for long-term investors, who want to buy options as more of a "downpayment" for stock in order to buy them early on when it's cheap, and convert them to stock later on.
If you're trying to trade options, don't bother with exercising it. Just sell the contracts after their value has increased. Make sure you buy contracts with long expiry dates, or else they might expire too soon, and force you to exercise them, or be owing for the entire value of the shares x strike price. That's a bad situation to be in.
If you buy an option and the stock increases, do I have to buy the stock in order to get the profit or do i get the profit without buying the stock.
For example:
say i have 500$
and I buy 500 1$ contracts to buy a 7 dollar stock.
The stock increases to 10 dollars. Can I get the 1500 dollars or would I have to have the full 5500$ to get the profit?
