This page sets out some typical rules which are employed in the early exercise of an option. However this is not to be construed as advice in any specific case, and you should seek your own independent advice before making any decisions.

The following table sets out the rule of thumb for when an American call option is likely to be exercised ahead of expiry, before the stock goes ex-dividend. Where a call option is deep-in-the-money, with little chance of the stock falling below the strike price before expiry, the option is a candidate for early exercise.

This generally occurs where the dividend the investor would receive, if they were to exercise the call, is greater than the interest expense incurred in buying the shares which are the subject of the option ahead of the expiry date. Generally this only occurs on the day before the ex-dividend date.

For in-the-money calls where the corresponding put still has some value, the rule used by most of the market is that if the value of the dividend is more than the value of the corresponding put plus interest, then the call should generally be exercised for the dividend. Writers of call options who want to avoid assignment being exercised against may need to either buy back or roll that short call position to another strike in another expiry, being mindful again that the option they roll to is not also a candidate for early exercise.

June Call deep-in-the-money. Therefore the June call will generally be exercised 3. The following table sets out the rule of thumb for when an in-the-money American put option is likely to be exercised ahead of expiry.

When put options are deep-in-the-money they become candidates for early exercise. Consider an how to exercise a call option early where an investor owns both stock and a put option over the same stock, and the put is trading at intrinsic value as is often the case when the option is deep in the money.

By exercising early, the holder of the put sells their shares at the exercise price daftar forex online indonesia the option and earns interest on stock market crash 14000 proceeds earlier than if they were to wait until expiry to exercise.

This usually occurs after how to exercise a call option early stock has gone ex-dividend, so that the dividend is retained by the shareholder. Another way of looking at whether the put should be exercised early is to compare the value of the corresponding call option with the cost of carrying the underlying stock to expiry.

Bbma forex youtube importance of this relationship is due to the fact that stock ownership plus a long put is an equivalent position to holding a call option with the same strike price and expiry. The two strategies are said to be synthetically equivalent.

When Should You Exercise an Option Early?

It is also the reason that mispricing between call and put options with the same strike and expiry is rarely found. Therefore the put will generally be exercised early.

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