premature exercise

Premature Exercise

A situation in which an option holder exercises the option before the expiration date. For example, suppose one has a call to purchase shares at $10 each that does not expire for some time. If the current price of the shares is $35, the holder may find it advantageous to exercise prematurely because there is no guarantee that the shares will remain that high closer to expiration. Premature exercise can be disadvantageous to the writer of the option, depending on his/her option strategy.

premature exercise

Exercise of an option by the owner before the expiration date. Although most options are exercised near expiration, an owner occasionally finds it advantageous to exercise prematurely. Such an action will often foul up the option writer's plan, in which instance the writer must sell (with a call) or purchase (with a put) the stock earlier than expected.
References in periodicals archive ?
Jeff Powell, Daily Mail: This premature exercise was necessitated by the potentially suicidal timing of England's toughest World Cup qualifying match at their most vulnerable point of the calendar year.
If you make an acquisition for cash, it will result in the premature exercise of an option on the target firm, which will lower the value of the option.