Exercise

AAA

DEFINITION of 'Exercise'

To put into effect the right specified in a contract. In options trading, the option holder has the right, but not the obligation, to buy or sell the underlying instrument at a specified price on or before a specified date in the future. If the holder decides to buy or sell the underlying instrument (rather than allowing the contract to expire worthless or closing out the position), he or she will exercise the option, and make use of the right available in the contract.

INVESTOPEDIA EXPLAINS 'Exercise'

In options trading, the buyer (or holder) of a call contract may exercise his or her right to buy the underlying shares at the specified price (the strike price); the buyer of a put contract may exercise his or her right to sell the underlying shares at the agreed-upon price. If the buyer chooses to exercise the option, he or she must inform the option seller (the writer of the option contract). This is achieved through an exercise notice, the broker's notification that a client wishes to exercise his or her right to buy or sell the underlying security. The exercise notice is forwarded to the option seller via the Options Clearing Corporation. Even though the buyer has the right but not the obligation to exercise the option, the seller is obligated to fulfill the terms of the contract if the buyer decides to exercise the option.

The majority of options contracts are not exercised, but instead are allowed to expire worthless or are closed by opposing positions. For example, an option holder can close out a long call or put prior to expiration by selling it (assuming the contract has market value). If an option expires unexercised, the holder no longer has any of the rights granted in the contract. In addition, the holder loses the premium that was paid for the option, along with any commissions and fees related to its purchase.

RELATED TERMS
  1. Call Over

    When the buyer of a call option exercises the option. In options ...
  2. Call

    1. The period of time between the opening and closing of some ...
  3. Cashless Exercise

    A transaction that is used when exercising employee stock options ...
  4. Warrant

    A derivative security that gives the holder the right to purchase ...
  5. Bermuda Swaption

    A derivative financial instrument that gives the holder the right, ...
  6. Option

    A financial derivative that represents a contract sold by one ...
Related Articles
  1. The Dangers Of Options Backdating
    Options & Futures

    The Dangers Of Options Backdating

  2. Should Employees Be Compensated With ...
    Options & Futures

    Should Employees Be Compensated With ...

  3. The Controversy Over Option Expensing
    Options & Futures

    The Controversy Over Option Expensing

  4. Going Long On Calls
    Options & Futures

    Going Long On Calls

comments powered by Disqus
Hot Definitions
  1. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  2. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  3. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  4. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  5. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
  6. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
Trading Center