earlyexercise

Early exercise is the act of exercising an option before its expiration date to convert it into the underlying asset. In options trading, the term most often refers to American-style options, which can be exercised at any time before expiration, as opposed to European-style options, which can only be exercised at expiration. Early exercise is usually not optimal for calls on non-dividend-paying stocks because the option’s time value generally exceeds the immediate payoff from exercising. However, it can be advantageous for calls on dividend-paying stocks just before the ex-dividend date, when receiving the dividend plus the stock may exceed the option’s remaining time value.

For puts, early exercise can sometimes be optimal when the option is deeply in the money and time value is small, though this is not common in stable markets. In practice, most American options are left unexercised until expiration or sold before expiry, and many brokers automatically exercise in-the-money options that meet certain criteria at expiration.

Early exercise is also a concept related to other instruments such as warrants and employee stock options. For these, the decision to exercise early is influenced by tax considerations, vesting or transfer restrictions, and expected future stock performance.

In summary, early exercise is a tool tied to the option’s time value and the holder’s expectation about the underlying asset, with practice depending on option type, dividends, and market conditions.