medium · FRM Part 1 Financial Markets and Products
An investor buys a 3-month American call option on a non-dividend paying stock.
Why is it generally sub-optimal to exercise this option before expiration?
- Early exercise of the option triggers an immediate margin call from the broker.
- The full remaining option premium already paid is permanently forfeited upon early exercise.
- American-style options can only ever legally be exercised on scheduled quarterly reset dates each year.
- Exercising destroys the remaining time value and the protection against further downside.
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