There has been the odd question about exercising options early, eg http://www.aussiestockforums.com/for...8&postcount=26
My answers may have not been very clear so thought I'd tidy it up a bit with an example to show how you can lose. This example will be with ETOs, but equally applies to company options. (For ease of calcs, no commish or expenses will be considered)
Lets say you own a contract (100) of EBAY Jan 2009 $20 call options. The value of that option right now is 11.60 with EBAY shares trading at 29.80. You have $5000 in your brokers account
That means you have an assets valued at $6,160 i.e. cash of $5k plus options valued at $1,160(what you paid for them is irrelevant for this example)
They're nicely in the money and you want to own the shares so you ring up your broker and ask him to exercise.
The next morning you check your brokers account and (presuming the shares are still trading at $29.80) you now have 100 EBAY shares valued at $2,980 and cash at $3,000, total assets of $5,980.
Hang on! $180 has disappeared somewhere. Where did it go?