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| Exercise Option |
The holder of an option contract may decide to exercise the option at the exercise or strike price if the contract is in the money. Exercising indicates that transaction of the asset takes place at the predetermined exercise price and the contract is terminated.
For a European type option, holder of the contract can decide to exercise the option only at the maturity. However, for an American type option, holder of the contract has the flexibility to exercise the option before the expiration date.
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For a call option, which gives the owner the right, but not the obligation, to buy an asset at the exercise price, the contract will be in the money when exercise price is below the spot price, and owner of the contract will decide to exercise the option to take delivery of the asset. For a put option, on the other hand, owner of the contract will decide to exercise his/her rights if exercise price is above the spot price.
