Exercise
In options trading, exercise refers to the act of using the contractual right granted by an option. For:
● A call option, exercising means buying the underlying asset at the strike price
● A put option, exercising means selling the underlying asset at the strike price
Exercise can happen at different times depending on the type of option:
● American-style options can be exercised at any point up to and including expiry
● European-style options can only be exercised at expiry
In many cases, investors may chose to sell the option, rather than exercise it, particularly if it still has time value.
However, if an option is in the money at expiry, some platforms may automatically exercise it unless the investor instructs otherwise. This process varies between platforms and may involve additional fees or tax considerations.
Why exercise matters to investors
Understanding the concept of option exercise can help investors make informed decisions when trading options. It may support:
● Making informed choices between selling or exercising
● Understanding how and when options rights can be used
● Manage outcomes at or before expiry
● Avoiding unintended actions, such as auto-exercise or missing deadlines
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.