Sign up  |  Log in

American Call options

Hello everyone,

i’m facing some issues understanding what does it mean when it’s said that, a non-dividend paying call option on a stock will not be exercised early because it won’t be valuable? it’s the case for only American call option

i’m not getting the idea behind this concept! anyone some help please?

"Wiley's prep material was a huge part of my success." - Lindsey G., USA

When a stock pays no dividend , you would never exercise the options early even if you can, because you would lose value. By early exercising, you lose time value. 

Instead, you would just sell the option if you wanted to exit the position.

If you think the stock price will decline, you’re better off just selling the call. Why would you exercise the option and buy the stock if you think it’ll decline in price?

If you think the stock price will increase, you’ll hold onto your call because it’ll appreciate in price (or you’ll be able to buy the underlying stock at the strike price after it has gone up in the future).

This all changes if the stock pays a dividend. In that case, the option holder does not get paid, and the guy who wrote the call option (covered call) will receive the dividend. In order to receive the dividend before the ex-dividend date, you may want to exercise the call to receive the dividend.