Using the right an option gives: buying the shares at the strike with a call, or selling them at the strike with a put. Only the holder of a long option can exercise.
Example
Say you hold a $30 call and the stock is at $36. Exercising means paying $3,000 for 100 shares worth $3,600, capturing the $600 of intrinsic value, but if the call still trades at $6.40, selling it brings in $640 and keeps the $40 of time value. That is why holders often sell rather than exercise before expiration.
Hypothetical numbers, for illustration only.
A flowchart of expiration. Question: in the money by $0.01 or more at the close? Yes leads to automatic exercise, where a long call buys 100 shares at the strike and a long put sells 100 shares at the strike, and the seller is assigned the other side. No leads to expires worthless. A highlighted note says to close or roll before expiration to avoid this.
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