It stands for early exercise premium; the difference between the premium (option price) of an American option and that of an otherwise identical European option. It reflects the value of the ability of the option’s holder to early exercise it instead of holding the option until its maturity. By nature, an American-type option or other similar security with an American-style exercise allows the holder to opt for exercise prior to its maturity date.

Early exercise premium is closely related to option time value. Option time value corresponds to the postponement of an exercise further into the life of an option, while the option early exercise premium reflects the ability to exercise it early, rather than waiting any longer. Option early exercise premium constitutes part the option time value in the case of an American option.

An option holder may choose to exercise before expiration in order to receive a dividend distribution (if he holds a stock option) or in implementation of a specific investment purpose. Also, early exercise may be a worthy tactic in case a particular option is deep in the money. For an in-the-money call option, early exercise could be an optimal course of action. In contrast, it is non-optimal to exercise an American call option on a non-dividend-paying stock before its expiration date. It can be optimal to early exercise an American put option on a non-dividend-paying stock because a put option should always be exercised early if it is sufficiently deep in the money.