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Myth #4: Nobody exercises an option before expiration, and so the risk of being assigned early is virtually nonexistent.

Fact: Although only approximately 10% of options are actually exercised, and the majority of those are exercised very close to the expiration date, a number of options are exercised prior to expiration. In fact, in-the-money equity call options will at times be exercised before expiration just prior to the stock going ex-dividend. The holder of an equity call option may exercise early to capture the dividend that would be foregone if the option were only exercised at expiration. For equity call options, the risk of early exercise is greater immediately prior to the underlying stock going ex-dividend. Equity put options are also occasionally exercised early. Early exercise of puts tends to occur when in-the-money puts are trading near parity (at their intrinsic value, no time premium left). Investors must remember that puts have a tendency to go to parity more readily than calls. So for put options, if the time premium has completely eroded, the risk of early assignment must definitely be taken into account.


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