Definition: Using the right one acquired by having purchased an option to call shares away from (or put shares to) another investor.

Example: Felix owns a call option on Treta Corporation that allows him to call, by paying $25 per share, the shares of Treta away from Alexandra, the investor who sold him the call option. The stock has rocketed up to $40 and the option’s expiration is approaching. Felix does some quick math and subtracts the strike price of $25 from the current price of $40. The result shows that the option is $15 “in the money”. Felix exercises the call by paying Alexandra the strike price of $25 for each share and receiving the shares. At this point, Felix can hold them as long as he wants or lock in a $15 per share profit by selling them for the $40 price they’re currently trading for.

Investeach explains: It’s really important to exercise any option that is in the money before it expires. In fact, if an investor fails to do so, his broker will automatically do it for him! On the other hand, any option which is “out of the money”, meaning that it has no value, will be abandoned by its owner and expire worthless.

Finally, American-style options can be exercised any time up through the expiration date, while European-style options can only be exercised on the expiration date.

Riddle me this:

1. An option with which status should always be exercised?
2. What is the deadline for exercising an option?
3. A person who does not exercise an option by expiration does what instead?
4. How do American- and European-style options differ with regard to expiration?

Related to: Call option, Put option,