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Early Exercise

What is 'Early Exercise'

The exercise of an option prior to its expiration date. Early exercise is only possible with American-style option contracts, which can be exercised at any time up to expiration, as opposed to European options, for which early exercise is not possible as they can only be exercised on the expiration date. Early exercise of a call option enables the call option buyer to purchase the underlying security at the strike price before expiration, while early exercise of a put option enables the put option buyer to sell the underlying security at the strike price before expiration.

Explaining 'Early Exercise'

While early exercise is generally not advisable, because the time value inherent in the option premium is lost upon doing so, there are certain circumstances under which early exercise may be advantageous. For example, an investor may choose to exercise a call option that is deeply in-the-money (such an option will have negligible time value) just before the ex-dividend date of the underlying stock. This will enable the investor to capture the dividend paid by the underlying stock, which should more than offset the marginal time value lost due to early exercise.


Further Reading


Pricing by American option by approximating its early exercise boundary as a multipiece exponential function
academic.oup.com [PDF]
… Nengjiu Ju, Pricing by American Option by Approximating its Early Exercise Boundary as a Multipiece Exponential Function, The Review of Financial Studies, Volume 11, Issue 3, July 1998, Pages 627–646, https://doi.org/10.1093/rfs/11.3.627. Download citation file …

Early exercise boundary and option prices in Lévy driven modelsEarly exercise boundary and option prices in Lévy driven models
www.tandfonline.com [PDF]
… Nengjiu Ju, Pricing by American Option by Approximating its Early Exercise Boundary as a Multipiece Exponential Function, The Review of Financial Studies, Volume 11, Issue 3, July 1998, Pages 627–646, https://doi.org/10.1093/rfs/11.3.627. Download citation file …

The value of early exercise in option prices: An empirical investigationThe value of early exercise in option prices: An empirical investigation
www.jstor.org [PDF]
… Nengjiu Ju, Pricing by American Option by Approximating its Early Exercise Boundary as a Multipiece Exponential Function, The Review of Financial Studies, Volume 11, Issue 3, July 1998, Pages 627–646, https://doi.org/10.1093/rfs/11.3.627. Download citation file …

The rationality of early exercise decisions: Evidence from the S&P 100 index options marketThe rationality of early exercise decisions: Evidence from the S&P 100 index options market
academic.oup.com [PDF]
… Nengjiu Ju, Pricing by American Option by Approximating its Early Exercise Boundary as a Multipiece Exponential Function, The Review of Financial Studies, Volume 11, Issue 3, July 1998, Pages 627–646, https://doi.org/10.1093/rfs/11.3.627. Download citation file …

Pricing early exercise contracts in incomplete marketsPricing early exercise contracts in incomplete markets
link.springer.com [PDF]
… Nengjiu Ju, Pricing by American Option by Approximating its Early Exercise Boundary as a Multipiece Exponential Function, The Review of Financial Studies, Volume 11, Issue 3, July 1998, Pages 627–646, https://doi.org/10.1093/rfs/11.3.627. Download citation file …

The early exercise of American putsThe early exercise of American puts
www.sciencedirect.com [PDF]
… Nengjiu Ju, Pricing by American Option by Approximating its Early Exercise Boundary as a Multipiece Exponential Function, The Review of Financial Studies, Volume 11, Issue 3, July 1998, Pages 627–646, https://doi.org/10.1093/rfs/11.3.627. Download citation file …

FDI and economic growth: the role of local financial marketsFDI and economic growth: the role of local financial markets
www.sciencedirect.com [PDF]
… Nengjiu Ju, Pricing by American Option by Approximating its Early Exercise Boundary as a Multipiece Exponential Function, The Review of Financial Studies, Volume 11, Issue 3, July 1998, Pages 627–646, https://doi.org/10.1093/rfs/11.3.627. Download citation file …

The influence of risk diversification on the early exercise of employee stock options by executive officersThe influence of risk diversification on the early exercise of employee stock options by executive officers
www.sciencedirect.com [PDF]
… Nengjiu Ju, Pricing by American Option by Approximating its Early Exercise Boundary as a Multipiece Exponential Function, The Review of Financial Studies, Volume 11, Issue 3, July 1998, Pages 627–646, https://doi.org/10.1093/rfs/11.3.627. Download citation file …

Early exercise of American put options: Investor rationality on the Swedish equity options marketEarly exercise of American put options: Investor rationality on the Swedish equity options market
onlinelibrary.wiley.com [PDF]
… Nengjiu Ju, Pricing by American Option by Approximating its Early Exercise Boundary as a Multipiece Exponential Function, The Review of Financial Studies, Volume 11, Issue 3, July 1998, Pages 627–646, https://doi.org/10.1093/rfs/11.3.627. Download citation file …


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