what is early exercise 
early exercise of an options contract is the process of buying or selling shares of stock under the terms of that option contract before its expiration date for call options the options holder can demand that the options seller sell shares of the underlying stock at the strike price for put options it is the converse the options holder may demand that the options seller buy shares of the underlying stock at the strike price understanding early exerciseearly exercise is only possible with american style option contracts which the holder may exercise at any time up to expiration with european style option contracts the holder may only exercise on the expiration date making early exercise impossible 1most traders do not use early exercise for options they hold traders will take profits by selling their options and closing the trade their goal is to realize a profit from the difference between the selling price and their original option purchase price for a long call or put the owner closes a trade by selling rather than exercising the option this trade often results in more profit due to the amount of time value remaining in the long option lifespan the more time there is before expiration the greater the time value that remains in the option exercising that option results in an automatic loss of that time value benefits of early exercisethere are certain circumstances under which early exercise may be advantageous for a trader early exercise and employee optionsthere is another type of early exercise that pertains to company awarded stock options eso given to employees if the particular plan allows employees may exercise their awarded stock options before they become fully vested employees a person may choose this option to obtain a more favorable tax treatment however the employee will have to foot the cost to buy the shares before taking full vested ownership also any purchased shares must still follow the vesting schedule of the company s plan the money outlay of early exercise within a company plan is the same as waiting until after vesting ignoring the time value of money however since the payment is shifted to the present it may be possible to avoid short term taxation and the alternative minimum tax amt of course it does introduce the risk that the company may not be around when the shares are fully vested 4early exercise examplesuppose an employee is awarded 10 000 options to buy company abc s stock at 10 per share they vest after two years the employee exercises 5 000 of those options to purchase abc s stock which is valued at 15 after a year exercising those options will cost 7 000 based on a federal amt rate of 28 5 however the employee can reduce the federal tax percentage by holding onto the exercised options for another year to meet requirements for long term capital gains tax 6