Exercise, Expiration, and Closing an Option Position
Summary
The document distinguishes an option's exercise date from its expiration date. Exercising means using the option right on a permitted date and receiving the payoff associated with that date. For an American option, the holder may choose an exercise date before or on expiration; for a European option, exercise is allowed only at expiration.
Selling an option before expiration is not the same as exercising it. A sale transfers ownership to another trader, while the seller receives the market price on the sale date. The option remains outstanding with its original terms, and its rights pass to the new owner. The explanation uses a call payoff to illustrate exercise, but does not discuss settlement procedures, exchange-specific contract rules, or differences between cash and physical delivery.
Key ideas
- Exercise is the act of claiming an option's contractual payoff on a date when exercise is allowed.
- American options can generally be exercised before expiration, while European options are exercised only at expiration.
- Expiration is the last date in the contract's life and is the sole exercise date for a European option.
- Selling an option closes the holder's position by transferring its rights to a buyer; it does not exercise the contract.
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Full text
# What is the difference between exercise and expiry date? # What is the difference between exercise and expiry date? I know in American options you can exercise the options at any time before expiry date but in European options you can only exercise the options on expiry day. On National Stock Exchange of India the options traded are European types but I have closed my option position before expiry. So I am confused between expiry date and exercise date. Can anyone tell the difference between these two with simple example? ## Answer by Slade (score 2, accepted) https://quant.stackexchange.com/a/50270 Exercising an option on some date $t$ means that you receive the payoff of the option $G_t$ on that date. For example, if a call option is exercised you'd get $(S_t - K)^+$ if you exercise on date $t$. For American options, since you can exercise whenever (as long as expiration has not yet occurred), the chosen date (by the owner of the option) to exercise is called the exercise date. And this date of exercise is on or before the expiration date of the option. For European options the only possible exercise date is the expiration date. If you close out your option position (by selling it), this is just giving the option a new owner, so all the option properties are still the same. You receive whatever the option price was in the market on the sale date and all the rights/privileges from owning the option goes to the new owner.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.