Where a position limit caps what you may hold, the exercise limit caps what you may convert into stock over a set window — typically five consecutive business days. The aim is to prevent a single participant from forcing an unmanageable delivery obligation onto the market.
Retail traders will never approach these thresholds, but the rule explains why institutional positions in a single name are structured across classes and expirations, and why limits are a standing question for anyone building a very large directional position through options.
Example: XYZ has a 25,000-contract limit at the class level. Holding 30,000 deep in-the-money calls, you could not exercise them all in one week even if you wanted the three million shares — the exercise limit binds before the delivery does.
Related: option-class, occ, position-effect, exercise