WarrenB1

pedpenny Wrote:
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> I think its pretty stupid, surely having the
> option to excercise early would be valuable with
> or without a dividend yield, even for pure
> liquidity reasons.


It's not stupid.

Think about what actually happens when you exercise an option on a stock prior to expiration. You exercise the call and you get the underlying. The stock you now own is still exposed to price fluctuations between now and expiration date and you just screwed yourself by deciding whether or not you want the stock earlier than when had to decide. Of course you can exercise and just sell the stock immediately but why not just sell the option or close out of the option? You're better off selling the option when you've made money on it vs exercising it way ahead of expiration.

Since you're better off just selling the option it ends up being the exact same thing as holding a European option.

The reason why this may not work out in real life is because of commissions, transaction fees and matching up order sizes; you won't be able to close out of a losing 10,000 contract position the day before expiration at a justifiable cost when you're paying commissions of $1 per contract. It has nothing to do with whether the market adjusts its prices as stated above.



Edited 2 time(s). Last edit at Wednesday, May 11, 2011 at 03:21PM by verse214.