The owner of an option contract has the right to exercise it, and thus require that the financial transaction specified by meaning contract meaning to be carried out immediately between the two parties, whereupon the option contract is terminated.
When exercising a call option exercise, the owner of the option purchases the underlying shares or commodities, fixed interest securities, etc. The option style, as specified in the contract, determines when, options, and under what circumstances, the option holder may exercise it.
It is at the options of the owner whether and in some circumstances when to exercise it. The following guidelines determine whether and when to exercise an option: A common strategy among professional option traders is to sell large quantities of in-the-money calls just prior to an ex-dividend date.
Quite often, non-professional option traders may not understand the benefit of exercising a call option early, [ citation needed ] and therefore may unintentionally forgo the stock of the dividend.
The professional trader may only be 'assigned' on a portion of the exercise, and therefore profits by receiving a dividend on the stock exercise to hedge the calls that are stock exercised. Assignment occurs when an option holder options his option by notifying his broker, who then notifies the Options Clearing Corporation OCC. The OCC fulfills the contract, options selects, randomly, a member firm who was short the same option contract.
The OCC then notifies the firm. The firm then carries out its obligation, and then selects a customer, either randomly, first-in, first-out, or some other equitable method who was short the option, for assignment.
That customer is assigned the exercise requiring him to fulfill the obligation that he agreed to when he wrote the option. This is called "exercise by exception". A broker or holder of such options may request that exercise not be exercised by exception. The price of the underlying security used to determine the need for exercise by exception is the price of the regular-hours trade reported last to the OCC at or before 4: Meaning trade will have occurred during normal trading hours, i.
It can be any size and come from any participating exchange. The OCC reports this price tentatively at 4: From Wikipedia, the free encyclopedia. Options, Futures and Other Derivatives, 5th edition. Stock Prices for Expiration" Accessed Jan 21, Credit spread Stock spread Exercise Expiration Moneyness Open interest Pin risk Risk-free interest rate Strike price the Greeks Volatility.
Bond option Call Employee stock option Fixed income FX Option styles Put Warrants. Asian Barrier Basket Binary Chooser Cliquet Commodore Compound Forward start Interest rate Lookback Mountain range Rainbow Swaption.
Collar Covered call Fence Iron butterfly Iron condor Straddle Strangle Protective put Risk reversal. Back Bear Box Bull Butterfly Calendar Diagonal Intermarket Ratio Vertical. Binomial Black Black—Scholes exercise Finite difference Garman-Kohlhagen Margrabe's formula Put—call parity Simulation Real options valuation Trinomial Vanna—Volga pricing.
Amortising Asset Basis Conditional variance Constant maturity Options Credit default Currency Dividend Equity Forex Inflation Interest rate Overnight indexed Total return Variance Volatility Year-on-Year Inflation-Indexed Zero-Coupon Inflation-Indexed. Contango Currency future Dividend future Forward market Forward price Forwards pricing Forward rate Futures pricing Interest rate future Margin Normal backwardation Single-stock futures Slippage Stock market index future.
Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative. Collateralized debt obligation CDO Meaning proportion portfolio insurance Contract for difference Credit-linked note CLN Credit default option Credit derivative Equity-linked note ELN Equity derivative Foreign exchange derivative Fund derivative Interest rate derivative Mortgage-backed security Power reverse dual-currency note PRDC. Consumer debt Corporate debt Government debt Great Recession Municipal debt Tax policy.
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Terms Stock spread Debit spread Exercise Expiration Moneyness Open interest Pin risk Risk-free interest rate Strike price the Greeks Volatility.