Early exercise test
Definition · Level 3 · Spreads & short options
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A call holder exercises early mainly when the next dividend is larger than the call’s remaining extrinsic value. A put holder does when a deep in-the-money put has almost no extrinsic value left.
Example
Dividend 0.80 against 0.05 of extrinsic value → assignment tonight is likely.
Where Tradecraft teaches it
Level 3 · Spreads & short options, in the lesson “Early assignment & dividends”: Why a short leg can be assigned before expiry, when it really happens, and what it does to a spread.
Related terms
- Dividend riskChance that a short in-the-money call is exercised on the last business day before the ex-date, leaving you short stock that owes the payout.
- Back-spread danger zoneWhere a back spread loses the most at expiry: the stock sitting at the long strike.
- BodyThe middle strike of a butterfly, short in a long fly: where a long fly earns the most at expiration.
- Breakeven win rateHow often a trade must win just to net zero, treating each outcome as a full win or a full loss: max loss ÷ (max profit + max loss).
- Broken-Wing ButterflyA butterfly with one wing pushed out: buy one call, sell two, and buy one much further away, so the two wings are different widths.
- Broken-wing condorA condor whose two wings have different widths, e.g. an iron condor with a 5-wide put spread and a 10-wide call spread.