Early Exercise in Options - A Basic Operation Every Trader Should Know

Some traders get caught off guard when their in-the-money put is suddenly assigned. Others wonder, can you exercise options early to grab a dividend or cut tax costs? This article breaks down what early exercise means, why exercising options early is rare, and when it actually makes sense to do it.

Key takeaways

• Early exercise in options is when you choose to use your right to buy or sell the stock before the option expires
• You can exercise options early only if they are American-style, not European
• If options don't have extrinsic value, your option is at risk of being assigned. This is something you can regularly see in ITM put options, for instance.

What is early exercise in options?

Early exercise in options means using your right to buy (call) or sell (put) the underlying stock before the option’s expiration date. You're not waiting for the contract to run its full course - you’re acting early. But this only works with American-style options, which let you exercise at any point before expiry. If you’re holding a European-style option, you’re locked in until expiration.

Strike price behavior also shifts as expiration approaches. The closer you get to expiry, the more the option’s value reflects real movement in the stock, not time value. That’s when early exercise becomes part of the conversation.

Here's how it works:

• Call option: you buy the stock at the strike price before expiration
• Put option: you sell the stock at the strike price before expiration

Can you exercise options early?

So, can you exercise options early? Yes - but only if the contract allows it. And just because you can doesn’t mean you should. Timing matters.

Even when exercising options early is possible, it usually doesn’t pay off. Selling the option often leads to better results because of time value. When you exercise early, you lose whatever time value is left.

As a quick recap, before using our advanced screener for options, note these things down:

• American-style = early exercise possible
• European-style = exercise only at expiration
• Time value often makes selling more profitable

When does exercising options early make sense?

Exercising options early only makes sense in a few cases. A common one is a deep in-the-money call that’s close to expiration and has almost no time value left. Another case is when the stock is about to pay a dividend. Since option holders don’t receive dividends, early exercise helps capture that payout.

You might also consider it for tax reasons, especially with employee options. But be careful – it only makes sense when time value is low, or the benefit clearly outweighs the cost.

Some valid reasons to exercise early:

• Dividend is coming
• Time value is gone
• Tax timing advantage (but in this case, you should certainly consult with a tax advisor first)