The option buyer's decision to use the right to buy or sell the underlying asset at the preset strike price, instead of closing the trade by selling the contract.
What exercise is
Exercise is the holder using the core term of the contract: buying the shares at the strike price (call) or selling them at it (put). Only the holder decides, and the seller receives the effect as an assignment.
The golden rule: sell, don't exercise (usually)
Exercising collects only the intrinsic value and burns the time value that is left, while selling the contract in the market collects both. So early exercise is a calculated exception, not a habit: a cash dividend larger than the thin time value, or a deep in-the-money put whose time value is below the interest on the freed-up cash.
At expiration
It happens automatically for every in-the-money contract by one cent or more, unless you instruct otherwise. If you don't want to take (or deliver) a hundred shares per contract, close the position before the final bell. “I forgot a winning contract” means shares and margin on Monday morning.
Hypothetical example
An in-the-money call with $8 of intrinsic value and $0.90 of time value a week ago: exercising now collects $8 and burns $0.90. Selling it for $8.90 is clearly better. The evening before a $1.30 dividend, the math flips and exercising becomes the sensible choice.
Common mistake
Exercising out of excitement: “The option is in the money, so I'll exercise and own the stock!” Owning the stock is always available by buying it directly. Exercise is a math decision (time value against dividend or interest), not a celebration.
When early exercise makes sense
In two calculated cases only: a deep in-the-money call the evening before a cash dividend that exceeds its remaining time value, and a deep in-the-money put where the interest on the freed-up cash exceeds that value. Otherwise selling is always better, because it collects intrinsic and time value together.
Where to see it on the platform
The Academy pages explain early-exercise math in detail, and the calculator shows both parts of the price so you can see what exercise would burn.
The Academy pages explain early-exercise math in detail, and the calculator separates intrinsic value from time value so you can see what is lost.
