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 optionsfor 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.

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 stockton market cafe to exercise a call option that is deeply in-the-money such an option will have early exercise call option dividend 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. Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund.

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