Early Exercise

AAA

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 TERMS
  1. European Option

    An option that can only be exercised at the end of its life, ...
  2. Deep In The Money

    An option with an exercise price, or strike price, significantly ...
  3. American Option

    An option that can be exercised anytime during its life. American ...
  4. Expiration Date (Derivatives)

    The last day that an options or futures contract is valid. When ...
  5. Fugit

    The amount of time that an investor believes is left until it ...
  6. Ex-Dividend

    A classification of trading shares when a declared dividend belongs ...
RELATED FAQS
  1. Why would a company issue a rights offering?

    Companies most commonly issue a rights offering to raise additional capital. A company may need extra capital to meet its ... Read Full Answer >>
  2. What is the difference between share purchase rights and options?

    There is a big difference between share purchase rights and options. With share purchase rights, the holder may or may not ... Read Full Answer >>
  3. What is the difference between an option-adjusted spread and a Z-spread in reference ...

    Unlike the Z-spread calculation, the option-adjusted spread takes into account how the embedded option in a bond can change ... Read Full Answer >>
  4. In what ways can a sinking fund affect bond returns?

    The effective yield of a bond sinking fund to an investor should not be considered similar to a bond nonsinking fund. Both ... Read Full Answer >>
  5. Can delta be used to calculate price volatility of an option?

    The delta of an option is a component of the Black-Scholes option pricing formula, which provides the implied volatility ... Read Full Answer >>
  6. What is the difference between a banker's acceptance and a post-dated check?

    Some common financial instruments that speculators use are stocks and financial derivatives. Speculation involves trading ... Read Full Answer >>
Related Articles
  1. Options & Futures

    How To Avoid Closing Options Below Intrinsic Value

    To get the best return possible on your options trading, it is important to understand how options work and the markets in which they trade.
  2. Options & Futures

    Options Basics Tutorial

    Discover the world of options, from primary concepts to how options work and why you might use them.
  3. Options & Futures

    Dividends, Interest Rates And Their Effect On Stock Options

    Learn how analyzing these variables are crucial to knowing when to exercise early.
  4. Markets

    Hedging With Puts And Calls

    This trading strategy can reduce your risk - but only if you use it effectively.
  5. Options & Futures

    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.
  6. Investing

    What More Volatility Means For Momentum Stocks

    One byproduct of the recent tick higher in bond yields: a meaningful rise in volatility for both stocks and bonds.
  7. Options & Futures

    How & Why Interest Rates Affect Options

    The Fed is expected to change interest rates soon. We explain how a change in interest rates impacts option valuations.
  8. Investing Basics

    Understanding Notional Value

    This term is commonly used in the options, futures and currency markets because a very small amount of invested money can control a large position.
  9. Options & Futures

    The Risks Of Writing Covered Calls

    While writing a covered call option is less risky than writing a naked call option, the strategy is not entirely riskfree.
  10. Options & Futures

    How Low Can Oil Prices Go?

    Record low oil prices are a welcome development for consumers, but oil companies are struggling with choosing market share over profitability.

You May Also Like

Hot Definitions
  1. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  2. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  5. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  6. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
Trading Center