When and Why to Exercise the Option Derivatives??

Before expiry, option of Exercising Option Derivative is available with American Option. In American Option the buyer of the option has a right to exercise the option. In stock Market Index options are European option and stocks option are American option

When to Exercise?
The chances of exercise increases, when the future of the option trades in discount and the Option reaches to expiry.

Why to Exercise?
There are two reasons to exercise the option:
1- The market Price of the option is less then the intrinsic value (i.e. Spot-Strike) of the option because by exercising the option buyer of the option would get better price then selling is the market.

2- Synthetic value of the put is more than the market price of the same strike put.
Here the arbitrager can exploit the Put-Call Disparity (PCD) by selling the synthetic put and buying actual put in the market

Example:

Company XYZ
Spot=160
Future=155
Strike=150
Call Price=9
Put Price=3

Synthetic Put=Call-(Future-Strike)
Synthetic Put=9-(155-150)
Synthetic Put=4

In the Above Example the stock is in discount of 5 (i.e.160-155), arbitrager can sell synthetic put at Rs 4 and buy the actual put at Rs 3 in the market , in this trade he collects net Rs 1 and reverse the position on expiry because on expiry the would not be any Put Call Disparity. This trade is risk free trade.

Comment:
In this trade we should also see the other costs like STT and Brokerage, if the net received value is more then the all cost any one go for it.