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Option Exercise Value Before Expiration

Article Quant Q&A · Author: Le Mai Anh
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Summary

The document distinguishes an option’s intrinsic value on exercise from the value of selling the option before expiration. For an American call, exercising produces the positive part of the difference between spot price and strike; for a put, it produces the positive part of strike minus spot. In the example, the call is in the money at the stated spot, so immediate exercise yields the spot-minus-strike amount, before considering any contract-specific costs.

This payoff is not the same as the option’s market value while time remains. The response points to Black–Scholes as a reference for valuing a sale, but gives no pricing calculation. The example therefore illustrates exercise value only; it does not establish whether early exercise is optimal or account for remaining time value, interest rates, dividends, or other market inputs. Its formula applies to exercise payoff, with American exercise assumed in the example.

Key ideas

  • Exercising a call yields the greater of spot minus strike and zero.
  • Exercising a put yields the greater of strike minus spot and zero.
  • The example’s in-the-money call has exercise value equal to the spot-strike difference.
  • Selling an option before expiration involves its market value, which can include time value.
  • The document does not determine whether early exercise is optimal or calculate a sale price.

Tags

OptionsDerivatives pricing
Full text
# How do I calculate option payoff before its expiration date?


# How do I calculate option payoff before its expiration date?












How do I calculate option payoff before its expiration date? For example, if I long a 6 month call with K = 11100, T = 0.5, p = 150, what would be the payoff of the option if I exercise it in 3 months time and if the spot price is 11300.?

## Answer by SmurfAcco (score 2)

https://quant.stackexchange.com/a/47084

If you exercise the option (assuming that is an american option) you would receive the intrinsic value, which is for a Call option $\max(S-K, 0) $, and for a Put option $\max(K-S, 0)$. Hence, 11300.00 - 11100.00 = 200. If you are talking about selling the option instead of exercising it, I recommend to have a look at the Black & Scholes model, John C Hull "Options, Futures and other Derivatives" is a good reference here.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.