Exercise

Exercise is when the holder of a long option invokes their right to buy (call) or sell (put) the underlying shares at the strike price. Exercise is the buyer's decision; the resulting obligation falls on the seller through assignment.

Most retail traders never exercise options, they simply sell the contract in the market before expiration to capture remaining value.

Why selling beats exercising: When you exercise an option, you forfeit any remaining extrinsic value. If your call has $5 of intrinsic value and $1 of remaining extrinsic value, exercising gives you $5. Selling the option in the market gives you $6. Selling is almost always the better choice unless the option has zero extrinsic value remaining.

When early exercise makes sense:

• Deep ITM calls with zero extrinsic value remaining, exercising to capture a dividend
• Deep ITM puts with zero extrinsic value and a desire to close a short stock position

American vs European style:

• American style (most US equity options): Can be exercised any time before expiration
• European style (SPX, NDX index options): Can only be exercised at expiration

Example: You hold an AAPL $180 call with AAPL at $200. The call has $20 of intrinsic value and $0.50 of extrinsic value remaining with 2 days to expiry. Rather than exercising (and receiving $20), you sell the call in the market for $20.50, capturing the full value including remaining extrinsic.

Related terms: Assignment, call option, put option, intrinsic value, expiration date, American-style

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