Exercising Options. An option may have either an American style exercise or European style exercise irrespective of where the recognized market is located. An American style option can be exercised by the purchaser at any time before the expiration. To do this, the purchaser notifies the dealer through whom the option was purchased. A purchaser should ascertain in advance from his dealer the latest date on which he may give such notice to his dealer. A European style option may only be exercised by the purchaser on a specified date. Upon receiving an exercise notice from the purchaser’s dealer, the clearing corporation assigns it to a member which may re-assign it to a client on a random or other predetermined selection basis. Upon assignment, the seller must make delivery of (in the case of a call) or take delivery of and pay for (in the case of a put) the underlying interest. In the case of a cash delivery option, the seller must, in lieu of delivery, pay the positive difference between the aggregate exercise price and the settlement value of the underlying interest (in the case of both a call and a put). A purchaser of an option which expires loses the premium paid for the option and his transaction costs. The seller of an option which expires will have as his gain the premium received for the option less his transaction costs.
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Sources: Account and Service Agreements, Account and Services Agreements, Account and Services Agreements