Answer-first summary for fast verification
Answer: It is never optimal to exercise an American call option on a non-dividend-paying stock before the expiration date, but it can be optimal to exercise an American put option on a non-dividend-paying stock early.
B is correct. For American options on non-dividend-paying stocks: - **Call options**: It is never optimal to exercise early because the time value of the option is always positive. By exercising early, you lose the time value and only receive the intrinsic value. - **Put options**: It can be optimal to exercise early when the option is sufficiently deep in the money. This is because early exercise allows you to receive the strike price immediately and invest it at the risk-free rate, which may be more valuable than holding the option. The key difference arises from the fact that for put options, the ability to receive the strike price early and earn interest on it can outweigh the time value of waiting.
Author: LeetQuiz Editorial Team
Ultimate access to all questions.
It is never optimal to exercise an American call option on a non-dividend-paying stock before the expiration date, but at any given time during its life, a put option should always be exercised early if it is sufficiently deep in the money.
A
It is never optimal to exercise an American call option on a non-dividend-paying stock before the expiration date, and it is never optimal to exercise an American put option early.
B
It is never optimal to exercise an American call option on a non-dividend-paying stock before the expiration date, but it can be optimal to exercise an American put option on a non-dividend-paying stock early.
C
It can be optimal to exercise an American call option on a non-dividend-paying stock early, but it is never optimal to exercise an American put option early.
D
Both American call and put options on non-dividend-paying stocks should never be exercised early.
No comments yet.