Early Exercise
Exercise of an American-style option before its expiration date. For long calls, early exercise is almost always a dividend story -- it makes economic sense to exercise a deep-ITM call the day before the underlying goes ex-dividend when the remaining time value is smaller than the upcoming dividend payment. For long puts, early exercise can be triggered by deep-ITM puts on hard-to-borrow stocks where the holder benefits from receiving the strike in cash and stopping borrow costs. European-style options (most US index options like SPX, NDX) cannot be early-exercised at all; American-style options (almost all US single-stock options) can be exercised any time up to and including expiration.
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Related terms
American Option · Asian Option · Barrier Option · Basket Option · Butterfly Spread · Calendar Spread
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