An American option is an option that can be exercised at any time prior to its expiration. This type of option is often used by investors who want to capture dividends that may be paid out before the option expires. How soon after ex-dividend date can I sell? You can sell your shares the day after the ex-dividend date, but you will not receive the dividend.
What is early exercise?
Early exercise is the act of exercising an option contract prior to its expiration date. For American-style options, this means that the option holder can exercise the option at any time up until expiration. For European-style options, the option holder can only exercise on the expiration date itself.
The main reason why an option holder would want to exercise early is because it allows them to lock in a profit. If the underlying security is trading above the strike price, then the option is in the money and the holder can buy the security at the strike price and immediately sell it on the open market for a profit.
There is also a risk involved with early exercise, however. If the underlying security is trading below the strike price, then the option is out of the money and the holder would be better off just selling the option contract itself. Exercising early also means that the option holder gives up the chance to keep the option contract alive in case the underlying security rallies before expiration.
Overall, early exercise is a decision that must be made on a case-by-case basis. There is no right or wrong answer, but rather it depends on the specific situation and market conditions.
What happens if I exercise my call option early?
When you exercise your call option early, you are essentially buying the underlying security at the strike price. This is beneficial if the current market price of the underlying security is higher than the strike price, as you will be able to buy it at a lower price. However, if the market price is lower than the strike price, you will be stuck with the underlying security at a higher price.
Can American options be exercised at any time?
Yes, American options can be exercised at any time prior to expiration. This flexibility can be beneficial if the underlying security's price moves favorably, as the option holder can choose to exercise the option and realize the profit. However, it also means that the option holder is exposed to the risk of the underlying security's price moving against them, as they may be forced to exercise the option early and incur a loss. Why are American options worth more than European? The main reason American options are worth more than European options is because American options can be exercised at any time during the life of the option, while European options can only be exercised at expiration. This means that American options offer the holder more flexibility in terms of when they can exercise the option, which in turn makes them more valuable.
Another reason American options are worth more is because they are less likely to be "burned" by early exercise. This is because American options can only be exercised if the underlying asset is above the strike price (for a call option) or below the strike price (for a put option). This means that there is less chance of the option being exercised early and the holder having to sell the underlying asset at a loss.
Finally, American options are also more liquid than European options. This is because there is a larger market for American options, as they are the most commonly traded type of option. This means that there is more demand for American options, which in turn makes them more valuable.