Early Exercise for American Options

Tags: #Financial #Economics

Equation

$$P_{V_{t},T}(dividends) > p(S_{t}, K) + K(1 ? e^{?r(T ?t)}) \\ K(1 ? e^{?r(T ?t)}) > c(S_{t}, K) + P_{V_{t},T}(dividends)$$

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Introduction

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Explanation

So we exercise the call option if the pros are greater than the cons, specifically, we exercise if:

• : The cons are that we have to pay the strike earlier and therefore miss the interest on that money and we lose the put protection if the stock price should fall. So we exercise the call option if the pros are greater than the cons.
• : Early Exercise getting the stock's dividend payments
• : Pay the strike earlier and therefore miss the interest on that money
• : put protection if the stock price should fall.
• : For puts options, the pros are the interest earned on the strike. The cons are the lost dividends on owning the stock and the call protection should the stock price rise.

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• Investopedia Put Call Parity

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