Final answer:
When an investor exercises an options position, they take action on the options contract they hold by buying or selling the underlying asset at the agreed-upon price.
This can be done to make a profit or protect against losses.
Step-by-step explanation:
When an investor wants to exercise an options position, it means that they want to take action on the options contract they hold.
This can involve buying or selling the underlying asset at the agreed-upon price specified in the contract.
The investor may choose to exercise the options position if they believe it will be profitable or if they want to hedge against potential losses.
For example, let's say an investor holds a call option contract to buy 100 shares of XYZ stock at a strike price of $50.
If the stock price rises above $50, the investor may choose to exercise the options position and buy the shares at the strike price. They can then sell the shares in the market at the higher price to make a profit.
On the other hand, if an investor holds a put option contract to sell 100 shares of XYZ stock at a strike price of $50, and the stock price drops below $50, they may choose to exercise the options position and sell the shares at the strike price, avoiding potential losses that would occur in the open market.