What is Early Exercise?
Early exercise refers to a situation in which an option holder has the right to exercise or assign an option before its expiration date.
How Does Early Exercise Work?
The option holder may decide to exercise the option before it reaches maturity by buying or selling the option.
For example, in November, Bob sells the long option of company ABC that he holds; even though the shares are due to expire in December.
In financial terms, European options do not allow for early exercise whereas the holder of an American option holds the right of early exercise.
Why Does Early Exercise Matter?
Even though it is not commonly employed, early exercise may be deemed useful by the option holder in certain cases, such as receiving dividends from stock options or because of some other financial commitment that requires the selling of the option.