Early Exercise
Early exercise is when the holder of an American-style option decides to use their right to buy or sell the underlying asset before the option’s expiry date.
This is only available with American-style options, not with European-style options (which can only be exercised at expiry).
Exercising early means choosing to carry out the trade the option gives you the right to make. For example:
● With a call option, that means buying the asset at the strike price
● With a put option, it means selling the asset at the strike price
Early exercise is relatively uncommon. Some investors may exercise early in certain scenarios, such as to access a dividend, realise a gain, or adjust their risk exposure. But exercising early means giving up any remaining time value the option still holds - which could make selling the option in the market a better outcome.
It is generally only considered in specific circumstances where the potential benefits outweigh the costs.
Why early exercise matters to investors
Understanding early exercise can support informed decision making when trading options. It may help investors:
● Avoid losing time value unnecessarily
● Evaluate whether to sell or exercise an option
● Assess the potential impact of dividends or market events
● Understand how American-style options differ from European-style ones
However, options are complex financial products and involve significant risk. They are not suitable for all investors. Understanding their mechanics, pricing influences, and the risk of loss is essential before considering trading.