Question

True or false: It is never optimal to exercise an American call option (on a non-dividend paying stock) early.

Group of answer choices

True

False

Answer 1

Answer,

True.

The investing term American option referes to contracts tht give the investor the right to buy or sell, a security at a specific price on or before a certain date. An American call option provides the investor with the right to purchase a security on or before the due date.

Early excicution can also happend leading up to the date a stock goes dividend.Ex-dividend is the cut off date by which share holder must own the stock to receive the next scheduled dividend payments.Option holder do not receive dividend payment .So, many investors will excercise their option before the ex-dividend date to capture the gain from a profitable position and get paid the dividend.( it is applicable in dividend payable case)

If there is no dividend it is not applicable and excercise only at the due date.

In the case of Non dividend stock it is better to excercise the stock at the due date. it is not optimal to excercise it before the due date.Becuase there is no benefit will get it excercise early in non dividend case.