Exercise
IntermediateTo exercise an option is to use the right it gives: to buy the underlying asset at the strike price for a call option, or to sell it at the strike price for a put option.
When an option holder exercises, the contract is carried out. For a call, the holder pays the strike price and receives the underlying asset. For a put, the holder delivers the asset and receives the strike price. Some options, especially on indices, are cash-settled, meaning the holder receives the difference in value rather than the asset itself.
An option holder should only exercise if it is profitable to do so. For example, if you hold a call with a strike price of 40 and the share trades at 55, exercising lets you buy at 40 something worth 55, a gain of 15 per share before the premium you paid. If the share traded at 35, you would not exercise, because you could buy it more cheaply in the market.
Before expiry, selling an option is often better than exercising it, because the option's market price includes time value as well as its exercise value.
Many exchanges automatically exercise options that are in the money by a small amount at expiry, unless the holder instructs otherwise. When an option is exercised, the seller on the other side receives an assignment.
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