Would you ever exercise an American option on a stock prior to maturity?
Posted on Nov 16, 2009 under Exercise | 69 CommentsI think the answer is yes and has to do with dividends, but I am not 100% sure.
I am refering to call or put options.
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November 16th, 2009 at 6:56 am
Unclear question — an option vests. (A promissory note matures.) Do you mean vest?
November 16th, 2009 at 6:56 am
The answer is yes.
An american option provides an investor a greater degree of flexibility since the option can be exercise anytime between the purchase date and the expiration.
Now, if you think that you have reach your goal, that is the price of the stock that you have anticipated that will give you a certain amount of profit, you might as well sell your option or exercise your option at the strike price.
It is your decision.
michelplafter@videotron.ca
November 16th, 2009 at 6:56 am
Yes and it does have to do with dividends. You’ll want to exercise early if the stock is about to pay a dividend and the "time value" of the option is less than the dividend.
What does that mean? Well, a stock’s price should drop after a dividend is paid so if the current market price is just slightly above your option’s strike price, the option could go from an "in the money" option (meaning if you exercise you’ll get some cash) to an "out of the money" option (meaning you’ll get nothing). Still, even this wouldn’t mean that you’d definitely want to exercise the option unless the expiry date of the option was also coming up. I.e. the stock price doesn’t have a reasonable chance of recovering from the dividend payment to get back "into the money".
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