Definition
Exercise (Options)
Exercise is the act of using an option's right to buy (call) or sell (put) the underlying at the strike price.
When an option holder exercises, they convert the contract into the underlying position. On the NSE, equity stock options are European-style, so they cannot be exercised early — they are automatically exercised at expiry only if in-the-money, leading to physical delivery of shares.
Index options like Nifty and Bank Nifty are cash-settled, so there is no actual delivery; instead the in-the-money value is credited or debited at expiry. Because of automatic exercise, traders must watch in-the-money positions near expiry to avoid an unexpected physical delivery obligation in stock options.
Related terms
- European vs American OptionsEuropean options can only be exercised at expiry, while American options can be exercised any time before expiry.
- Physical vs Cash SettlementPhysical settlement delivers the actual shares at expiry, while cash settlement just exchanges the profit or loss in money.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.