Question

When would you exercise an American call option? When would you exercise an American put option?

Answer 1

When an American call option to be exercised:

In case of call option, the investor has the right to exercise the option any time until the date of expiration. For example if an investor has purchased an option of apple in March that expires in December, the investor has the right to exercise it any time until expiration date. But if it is a European option, it can be exercised only on date of maturity in December. Suppose if the share price becomes optimal for exercise in august the investor still needs to wait until December when it would be out of money & virtually worthless.

Assume the investor exercised the call option on Apple prior to the expiration date. The investor would be long 100 shares of Apple at the specified strike price. Conversely, if the investor waited until the expiration date and Apple's stock price closed at least 1 cent above the strike price, the investor would be automatically exercised and long 100 shares.

When an American put option can be exercised?

In contrast American put option can be exercised any time until the expiration date. For example if a facebook put option July has been purchased in January. The investor has the right to exercise the option anytime on or before the date of expiration. If the investor decides to exercise the put option, the investor would be short 100 shares of Facebook at the predetermined strike price