Exercising the Option

Posted in Finance, Accounting and Economics Terms, Total Reads: 821
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Definition: Exercising the Option

An option gives a right but no obligation to the buyer to enter into a transaction involving an underlying asset at a predetermined price. When the option holder actually executes his right he said to be exercising the option.

An option holder will exercise the option only if it results in ‘in – the –money ‘situation. A call option is in-the-money if the spot price is greater than the exercise price.A call option is in-the-money if the spot price is lesser than the exercise price. Basically it means that the investor is making the money by exercising the option immediately.

A European option can be exercised only at maturity whereas an America option can be exercised any time until maturity.

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