Early Exercise

Those people out jogging at 5 am. You know they just do it to show you up...

In options trading, an early exercise occurs when an options contract is cashed in before its expiration date. When you buy an options contract (a deal that gives you the right to buy or sell something...like a stock or a commodity...at a certain price), it comes with an expiration date. Some options can only get activated on the exercise date. Others allow you to do it any time prior to the exercise date. When you close out early, that's an early exercise.

Example: it's February 1 and you buy an option that gives you the right to purchase 100 shares of Love Potion Chemical Co. at $50 per share. The option has an exercise date of March 1. As February starts, the stock is trading at $45 per share.

But for reasons you can't figure out, the stock spikes on February 14 and is now trading at $55 per share. Rather than hope the price increase stays until the end of the month, you elect to exercise your option early. You cash in the option, buying shares at the pre-arranged price of $50 per share. You then immediately sell them for the current value of $55 per share, and bank the extra $5. For the 100 share, you earn a total profit of $500 (minus whatever it cost you to buy the option).

Then you go home with nothing more than a happy story about earning $500 in the options market, only to find your spouse expectantly waiting, first with an air of flirty anticipation, then with an attitude that slowly morphs from confusion to annoyance and then to downright hostility...for reasons you can't figure out.