Early exercise
Definition · Level 1 · Options basics
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Using an American option's right before expiration. Usually wasteful, as it forfeits time value: never optimal for a call on a non-dividend stock when rates are ≥ 0. Exceptions: a deep ITM call just before an ex-date whose dividend exceeds its time value, or a deep ITM put when rates are positive.
Example
Exercising the 50 calls (0.05 time value) the day before a 0.60 dividend goes ex.
Where Tradecraft teaches it
Level 1 · Options basics, in the lesson “Exercise, assignment & settlement”: American vs European, auto-exercise, early exercise, physical vs cash, splits.
Related terms
- AM vs PM settlementWhether a cash-settled index option's final value comes from opening prices on expiration morning (standard monthly SPX, last trade the day before)…
- American-styleExercisable on any business day up to and including expiration; the norm for US stock and ETF options.
- AssignmentNotice that an option you are short has been exercised, obliging you to sell (short call) or buy (short put) the stock at the strike.
- Cash settlementSettling in cash instead of delivering the underlying: an exercised option pays its intrinsic value × multiplier; a futures contract pays the…
- Contract adjustmentOCC change to an option's deliverable, strike or quantity after a split, merger or special dividend, keeping both sides economically whole.
- DeliverableExactly what changes hands if a contract is exercised: 100 shares of the stock for a standard US equity option; after a split, merger or special…