Early Exercise
Content
Definition
Early exercise refers to the action of exercising (i.e., acting upon) an option before its expiration date, often to secure a profit or minimize a loss.
Usage and Context
Early exercise is common in options trading. Traders do this to take advantage of market conditions before the option expires.
Frequently asked questions
- What happens when you exercise a put option early? When you exercise a put option early, you sell the underlying asset at the agreed price. This can be useful if the market price drops sharply.
- When should you early exercise a call option? You should early exercise a call option if the underlying asset`s dividend is more than the option`s remaining time value. This way, you can own the asset and receive the dividend.
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Benefits
Early exercise can help you manage risk. It allows you to act on market changes quickly, either to take profits or reduce losses.
Conclusion
Early exercise is a useful strategy in options trading. It gives you flexibility to respond to the market, helping you manage your investments better.
