Exercising an option is the act of invoking the contract's terms to obtain the underlying asset at the fixed strike price (for a call) or to transfer the underlying asset in exchange for the strike price (for a put).
Options give the holder the right, not the obligation, to take this action. In American-style options, exercising can occur at any time before expiration; European-style options allow exercise only at expiration. After exercise, the contract results in a transaction with the writer—physical settlement delivers the asset, or cash-settled contracts pay the difference between the market price and the strike price, depending on terms.
Exercising is most likely when an option has intrinsic value, but it can be influenced by factors such as time value, dividends, and settlement type. Writers face an obligation once the option is exercised, which may involve delivering the underlying asset or paying cash depending on the contract.
Example: A holder exercises a call option on 100 shares of XYZ with a $50 strike price, paying $5,000 to receive the shares.
Option · Call option · Put option · Strike price · Expiration date · Assignment (finance)