Early Exercise
 |
Definition of 'Early Exercise'The exercise of an option prior to its expiration date. Early exercise is only possible with American-style option contracts, which can be exercised at any time up to expiration, as opposed to European options, for which early exercise is not possible as they can only be exercised on the expiration date. Early exercise of a call option enables the call option buyer to purchase the underlying security at the strike price before expiration, while early exercise of a put option enables the put option buyer to sell the underlying security at the strike price before expiration. |
 |
Investopedia explains 'Early Exercise'While early exercise is generally not advisable, because the time value inherent in the option premium is lost upon doing so, there are certain circumstances under which early exercise may be advantageous. For example, an investor may choose to exercise a call option that is deeply in-the-money (such an option will have negligible time value) just before the ex-dividend date of the underlying stock. This will enable the investor to capture the dividend paid by the underlying stock, which should more than offset the marginal time value lost due to early exercise. |
Related Definitions
Articles Of Interest
-
Options Basics Tutorial
Discover the world of options, from primary concepts to how options work and why you might use them. -
Dividends, Interest Rates And Their Effect On Stock Options
Learn how analyzing these variables are crucial to knowing when to exercise early. -
Hedging With Puts And Calls
This trading strategy can reduce your risk - but only if you use it effectively. -
4 Reasons To Hold Onto An Option
There are times when an investor shouldn't exercise an option. Find out when to hold and when to fold. -
How To Avoid Closing Options Below Intrinsic Value
Find out how to get a better price for your option and increase your trading profits. -
Arbitrage Squeezes Profit From Market Inefficiency
This influential strategy capitalizes on the relationship between price and liquidity. -
Making It Big On Wall Street
Read about some of the most glamorous Wall Street jobs and what it takes to land one. -
Quants: The Rocket Scientists Of Wall Street
Blend math, finance and computer skills to command a high - and well deserved - salary. -
Build A Baby Berkshire
Get a piece of Warren Buffett's profit by using Form 13F to coattail his picks. -
Cash: A Call Option With No Expiration Date
Cash is generally regarded as a drag on investment returns, but sometimes it may be preferable to hold a substantial cash amount instead of investing it in other assets. This is because having ...
Free Annual Reports
