Options Exercise

The option can be exercised

By Kesavan Balasubramaniam Updated Oct 13, The use of options has increased dramatically over the years as a way to profit from or hedge against the volatile movements of stock prices.

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Not only can options be traded with stock as the underlying asset, they are also traded on foreign currency, interest rates and various indexes. There are two kinds of stock options, American and European.

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American options can be exercised any time up to and including the expiration date of the option. However, European options can only be exercised on the date of expiration.

A put option is a contract that gives its holder the right to sell a set number of equity shares at a set price, called the strike pricebefore a certain expiration date. If the option is exercisedthe writer of the option contract is obligated to purchase the shares from the option holder. Key Takeaways A put option is a contract that gives its holder the right to sell a number of equity shares at the strike price, before the option's expiry. If an investor owns shares of a stock and owns a put option, the option is exercised when the stock price falls below the strike price. Instead of exercising an option that's profitable, an investor can sell the option contract back to the market and pocket the gain.

Expiration dates follow three cycles: January, February and March. The January cycle is comprised of the first month of each quarter January, April, July and October ; the February cycle consists of the second month of each quarter February, May, August and November ; and the March cycle consists of the final month of each quarter March, June, September and December.

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Because expiration dates are usually identified just by a month, a specific date is identified within the expiration month that is used as an exact deadline. This deadline, for both types of options, is the third Friday of the expiration month.

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An investor normally has until pm Central time on the third Friday of the month to instruct their broker to exercise an option. Article Sources Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.

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Options Industry Council. Compare Accounts.

Styles[ edit ] The option style, as specified in the contract, determines when, how, and under what circumstances, the option holder may exercise it. It is at the discretion of the owner whether and in some circumstances when to exercise it. European — European-style option contracts may only be exercised at the option's expiration date. Thus they can never be worth more than an American-style option with the same underlying strike price and expiration date.