Using the right in an option to buy (call) or sell (put) the underlying at the strike price.
Buyers exercise; sellers get assignment. Most traders never exercise: they sell the option to close because extrinsic-value is lost by exercising early. Brokers auto-exercise options that are in-the-money by $0.01 or more at expiration unless told otherwise.
Early exercise makes sense mainly for deep ITM calls right before a large dividend or for deep ITM puts when interest rates are high.
Example: you hold a $90 call trading at $12.30 with the stock at $102. Exercising captures $12 of intrinsic value; selling the call captures $12.30. Selling is better by $30 per contract.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.Time decay of an option's value. The part of an option's price that is only time — its extrinsic value — drains away every day and must reach zero at expiry. The slide is gentle months out and steepest in the final weeks, which is what traders call theta.
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