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Market Structure

Exercise (Options)

Using the right granted by an option contract to buy (call) or sell (put) the underlying stock at the strike price.

What does "exercise" mean in options?

To exercise an option is to use the right the contract grants you. The option holder decides to exercise; the option seller has no say and is assigned.

  • Exercising a call: buy 100 shares of the underlying at the strike price, regardless of where the stock is trading.
  • Exercising a put: sell 100 shares of the underlying at the strike price.

When exercise makes sense

Most options are not exercised. Traders close the position by selling the contract instead, because doing so captures both the intrinsic and remaining extrinsic value. Exercising gives up the extrinsic portion.

Exercise is more common:

  • At expiration, where any ITM option is auto-exercised by the broker.
  • On deep-ITM American-style options close to expiration, where extrinsic value is near zero.
  • Before a dividend on calls, where capturing the dividend may outweigh the remaining extrinsic.

Automatic exercise at expiration

Brokers auto-exercise any option that is a penny or more in the money at expiration. If you do not have the capital to take delivery, close the position before the close on expiration day to avoid unexpected assignment.

Related Terms

Assignment (Options)

When the seller of an option is forced to fulfill the contract because the buyer exercised. Happens randomly and cannot be refused.

Expiration Date (Options)

The last day an option contract is valid. After this date, unexercised options expire worthless.

In the Money (ITM)

An option with real value right now. A call is ITM when the stock is above the strike; a put is ITM when the stock is below.

Options

Contracts that give the buyer the right, but not the obligation, to buy or sell a stock at a specific price before a specific date.