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.
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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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.