The exercise date is related to financial options and refers to the day on which the option buyer has the right to exercise it.
The exercise date is established in the conditions of the contract for said option or option package.
Exercise date in financial options
Options are financial derivatives whose buyer has the right to secure a future price on an underlying asset, in exchange for paying a premium to the seller. Thus, if the underlying reaches the agreed price (or exercise price), the buyer will see the possibility of obtaining benefits and will exercise their rights to realize them.
The seller, by definition, must abide by the will of the buyer. Otherwise, you will abandon the option having lost the price of the purchase premium, which is irrecoverable.
Thus, setting the exercise date implies a series of consequences for its holder, the buyer, when exercising their right.
Based on this date, these derivatives are classified into the following three groups:
- American options: Their exercise date is not limited to a specific day, but extends to the entire holding period of the option until its expiration. What does it mean? The buyer may exercise the right at the time it deems appropriate without any restriction in this regard.
- European options: Your exercise date is limited to a specific day. What does it mean? The buyer may only exercise the option on the day established for it in the contract.
- Bermuda options: Your exercise date is made up of several dates that are determined at the beginning of the contract. What does it mean? The buyer can only exercise his right on those specific dates.
In the case of the European and Bermuda options, the situation may arise that the buyer does not want to exercise the option on the first exercise date. In this case, this is not related to the "validity" of the option, which will remain alive until its last exercise date.
Belonging to one group or another according to the exercise date also has economic effects on the buyer and seller. Specifically, the cost of the premium of the options will be directly proportional to the possibilities of dates to exercise the right. For this reason, the premiums of the American options are usually more expensive than the European ones and these, in turn, more than the Bermuda shorts.
To know more about the options, their operation and their classes, you can enter here.