I would like to walk through what happens in the case of, say, buying a call option on the nasdaq (taken as example because I can just link to the prices).
Current stock price = 39.209
So let's say I buy a call option for MSFT with a strike price of 39.50. The nasdaq options summary page lists the call prices like this :
Apr 19, 2014 0.39 -0.10 0.36 0.38 19 1740 MSFT 39.50
0.36 is highest bid, 0.38 is lowest ask. So let's assume you can buy this option at 0.38, and you do.
So now you have an option:
strike price 39.50
1) 0.38 is a per-share price, right ? Or is it really the case that paying 0.38 gives you a 100 share option contract (which I read is the only one available on all US exchanges). So you pay USD 38 + commission, right ?
2) As I understand American style options, this gives you the right to buy 100 MSFT shares at any point between now and Apr 19 for 39.50 per-share. Is that accurate ? How do you signal that you want to exercise an option, or does it just happen automatically when in-the-money ?
3) Suppose you have an option that's in-the-money and about to expire, but you don't have a margin account. Concrete example : suppose miscrosoft goes up to 42$ by 19/4. What happens if you have less than 3950 USD available in your account ?