Option Exercise Definition
Option exercise is the process when option holder uses (exercises) his right and buys (call option exercise) or sells (put option exercise) the underlying asset at the option’s strike price.
Exercise and Assignment
The other side of this transaction is taken by option writer and is known as assignment.
Exercise by Exception (Automatic Exercise)
It is common practice in many option markets that an expiring in-the-money option is automatically exercised on behalf of its holder without the holder having to do anything. This protects the holder in case he forgets or is unable to exercise the option manually.
For instance, the Options Clearing Corporation (OCC) in the US exercises expiring equity or index options automatically if they are at least $0.01 in the money.