Early Exercise
Exercising an option before expiration — usually a mistake
Definition
Early exercise is the act of exercising an American-style option before its expiration date. While this right is valuable, it is rarely optimal for call options because the option usually has time value remaining that would be lost by exercising early. However, early exercise of deep in-the-money puts may be rational if the time value remaining is less than the interest earned on the strike price proceeds. Early exercise of calls may make sense just before a large dividend payment.
Example
You hold an in-the-money American call option with a $1.00 time value remaining. If you exercise early to capture the underlying stock, you forfeit that $1.00 — it is usually better to sell the option and capture full value. An exception: if a $5.00 dividend is about to be paid and your call has only $0.50 of time value, exercising early to capture the dividend may be rational.
Related Terms
Frequently Asked Question
What is early exercise in options?
Early exercise means exercising an American option before expiration. It's usually suboptimal for calls because it forfeits remaining time value. It can make sense before large dividends or for deep ITM puts.
APA Citation
Last updated:
· Source: VixShield Trading Glossary — From SPX Mastery by Russell Clark
⚠️ Not financial advice. This definition is educational content from the SPX Mastery book series by Russell Clark (VixShield). Past performance is not indicative of future results. Trading options involves substantial risk of loss and is not appropriate for all investors. Always paper trade before risking real capital.