The term early exercise refers to a feature of American options that permit the holder to exercise the option prior to its expiration date. While most index options are of the European-style, options involving equities are typically of the American-style.
While European options can only be exercised on their expiration date, American-style options allow holders to exercise the option prior to its expiration date. Early exercise of a call option allows the holder to purchase the underlying asset, or stock, at the strike price prior to expiration. Early exercise of a put option allows the holder to sell the underlying asset, or stock, at the strike price prior to expiration.
The total value of an option includes both an intrinsic as well as extrinsic component. The extrinsic value of an option is equal to its moneyness, while the intrinsic value of an option is a function of the volatility of the underlying asset and the option's time to expiration. When an option is exercised early, the investor is giving up the intrinsic value of the option. For this reason, and under most circumstances, it's not advisable to exercise an option early. However, under certain conditions the early exercise of an option may be advantageous: