If you choose to immediately sell your shares, your custodian may loan you the entire amount required, at a very competitive interest rate, to exercise your options. You then pay back the loan when the shares are received and have the difference from the sale to invest or spend, as you see fit.
If you decide to exercise your options and postpone selling until the shares are received, your custodian may loan you up to a certain % of the stock’s current market value to pay for the exercise. Once the shares are received in your account and sold, the custodian typically credits you with the available funds on settlement date, less any fees and accrued debit interest on the amount loaned. If you choose to exercise and hold your shares, your shares may be eligible to be used as collateral for a margin loan.
First, your custodian must approve your account for margin borrowing. Next, the marginability of the individual security will be reviewed. Once this has been completed, your custodian may execute your options and may advance up to a certain % of the account’s current market value or a % of the market value of the shares you will receive through the option exercise.
Margin accounts and may not be suitable for all investors. Borrowing on margin and using securities as collateral may involve a high degree of risk. Market conditions can magnify any potential for loss. If the market turns against the investor, he or she may be required to deposit additional securities and/or cash in the account. The securities in the account may be sold to meet the margin call, and the firm can sell the investor’s securities without contacting them. The interest rates charged are determined by the amount borrowed. Please visit sec.gov/investor/pubs/margin.htm for additional information. Please read the New Account Form and Client Account Agreement carefully before signing. In addition, all new margin clients typically receive a truth-in-lending statement from the custodian and a sample margin statement published by FINRA that fully explains margin risks.