Why should you never exercise a call option before maturity

For an American call (on a stock without dividends), early exercise is never optimal. The reason is that exercise requires payment of the strike price X. By holding onto X until the expiration time, the option holder saves the interest on X.

When should a call option not be exercised?

You only exercise an option if you want to buy or sell the actual underlying asset. It’s important to note that most options are not exercised, even the profitable ones. For example, say you bought a call option for a premium of $1 on a stock with a strike price of $10.

Should you exercise an option early?

If you early exercise your options as soon as they’re granted, you likely won’t owe additional taxes (at the time of exercise) because you’re buying them at fair market value (assuming there’s no spread between what the stock is currently worth and how much you paid).

Can you exercise a call option before expiration?

The holder of an American-style option contract can exercise the option at any time before expiration. Therefore, an option writer may be assigned an exercise notice on an open short option position at any time before expiration.

Why options are rarely exercised?

Options are rarely exercised because many investors choose to close them instead — you need to complete this process before they expire. Options give you the right to exercise, but you’re never obligated to go through with it. You can close contracts to earn a profit, which more people tend to do.

What happens if you exercise a call option early?

What Is Early Exercise? Early exercise of an options contract is the process of buying or selling shares of stock under the terms of that option contract before its expiration date. For call options, the options holder can demand that the options seller sell shares of the underlying stock at the strike price.

When should you exercise options?

It only makes sense to exercise your options if they have value. If they do, they’re known as “in-the-money.” This happens when the strike price (or exercise price) of your stock options is lower than the market price of your company shares trading on the exchange.

What happens if call option expires?

When a call option expires in the money, it means the strike price is lower than that of the underlying security, resulting in a profit for the trader who holds the contract. The opposite is true for put options, which means the strike price is higher than the price for the underlying security.