American vs European Options option, before, someone, american, exercise

Nishant1

Can someone just explain in others words the reason to exercise an american option before expiration ? And also why there is never a reason to exercise an american call/put early ? Thanks

bluejazzy

it was a true/false statement, so i replied false because i thought of the case of a dividend pay stock, but the answer is that the statement is correct. And in the answer they said it doesn't worth it except for a divid-stock where it can be interesting. That's why I was confused..../definitely that was a tricky question

ramzes

Miss*Yiota Wrote:
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> So based on what has been said here, I have a
> concern with one question i did. The question said
> it doesn't worth it to exercise an american call
> option before expiration, and the answer said the
> statement is true. I would have said it's not
> correct since we can exercise prior to the
> ex-divid date.
> Any thoughts guys ? I found it tricky as answer


I think we need more detail on the question. It would be true on a non-dividend paying stock, a futures contract, a forward contract, etc..

shootingstar

So based on what has been said here, I have a concern with one question i did. The question said it doesn't worth it to exercise an american call option before expiration, and the answer said the statement is true. I would have said it's not correct since we can exercise prior to the ex-divid date.
Any thoughts guys ? I found it tricky as answer

ajpheif16

ohai Wrote:
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> I don't get it. I'm pretty sure it's normal for
> options desks to mark their positions at mid. So,
> if they sold at a bid price, they would have to
> recognize a lost.


They just recognize a sale not a paper loss.

sgupta0827

Are we still talking level 1 stuff?

rkapoor

I don't get it. I'm pretty sure it's normal for options desks to mark their positions at mid. So, if they sold at a bid price, they would have to recognize a lost.

siavosh

ohai Wrote:
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>
> Also, it is sometimes cheaper to exercise options
> compared to selling them, since spreads can be
> non-negligible.


Imagine a trader who says "well, my real cost of selling the option is half the spread". That would be something.

ramdabom

Cinderella Wrote:
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> The assymetric payoff of options means that you
> would still gain more from favorable price
> movements than you would lose from adverse
> movements even if you're already deep in the
> money.

I was about to make reference to this after neglecting it in my post (and after reading Joey's point), however from what I understand is that the assymetric payoff was always in reference to the sum of values for all options (although it wouldn't matter in the example I provided)...I just used that because I don't remember anywhere in the level 1 material where it stated selling over exercising; I think we're getting ahead of ourselves here.

waldziuchna

Ok, I'm pretty sure its wrong to argue that options should be exercised due to time value being more or less valuable depending on the moneyness. The whole point of options pricing theory is that volatility is supposed to be fairly priced.

Of course, there are some practical considerations that might influence your trading behavior in real life. For instance, you might want to exercise a deep in-the-money call option before a dividend ex-date. If delta is close to 1, it's better for you to hold the stock and receive the dividend, compared to owning the call option and losing intrinsic value once the stock goes ex-dividend.

Also, it is sometimes cheaper to exercise options compared to selling them, since spreads can be non-negligible.