the possibility of early exercise is not valuable for call options on non-dividend paying stocks what is the reason for this?
where does it say that? are u sure they are not talking abuot options on forwards, which are in fact not valuable? im pretty sure that early exercise of options on stocks are valuable, hence the reason why american are more expensive than eauropean.
it is question 100 of the schweser practical test vol 1 exam 3 I got confused as well …
whats the question, does it say anything about the option being deep in or out of the money
For about the 1,000th time on this forum…american options on nondividend paying stocks are equal to european. It is never optimal to exercise early if no dividend is to be paid.
so then american and european options will be the same price for non divident paying stocks since american has no added benefit?
Why would you exercise your option early (in case of American) when you have not extra cash flow in the form of dividends. I mean, what’s the added benefit of holiding a non-dividend paying stock now as against holiding it when the option expires (on maturity for European). So the prices will have to be equal. But the story would have been different if it was a dividend paying stock and then AO becomes more valuable over EO.
even there is no dividend, of course I still prefer AO since it offers the flexibility of early exercise, especially when market expectation changes I think this fundamental of the option stuff I guess in this topic, the preassumption should be that the market is stable or something similar and then the dividend paying will be a critical factor
ndzhai Wrote: > especially when market expectation changes > I think this fundamental of the option stuff > > I guess in this topic, the preassumption should be > that the market is stable or something similar and > then the dividend paying will be a critical factor I don’t understand any of this post above. There are no preassumptions beyond those of the model itself. We can mathematically prove that american call options on nondividend paying stocks are equivalent to european regardless of any market stability, moneyness, or any other factor.
swaptiongamma Wrote: ------------------------------------------------------- > Why would you exercise your option early (in case > of American) when you have not extra cash flow in > the form of dividends. i think the original post’s issue was that if market conditions change and the option starts to lose value if it is already in the money, u want to have the flexibility to call, cash flow or not.
I am overthinking this. What about a put when the Stock is at $0 and the stike is at $100. Can’t you invest the proceeds at the risk free rate with the American option? Or does no arbitrage cover this?
DanLieb, you are absolutely correct, puts are the exception. Because the stock is bounded by 0, it means that there is a benefit to early exercise, and if I recall, the price of an American put should be higher than that of the European put to prevent arbitrage
well not ‘prevent’ but to make efficient
the show NY Wrote: > > i think the original post’s issue was that if > market conditions change and the option starts to > lose value if it is already in the money, u want > to have the flexibility to call, cash flow or not. theoretically, no matter in what direction the underlying is going, if the market is pricing this option efficiently, the price of the option will be higher than its intrinsic value (the proceeds from exercise). so even if you wanted o cash out, you’ll just sell the call and get more cash, you will not exercise it and get less. no early exercise.
Mobius Striptease Wrote: ------------------------------------------------------- > the show NY Wrote: > > > > i think the original post’s issue was that if > > market conditions change and the option starts > to > > lose value if it is already in the money, u > want > > to have the flexibility to call, cash flow or > not. > > theoretically, no matter in what direction the > underlying is going, if the market is pricing this > option efficiently, the price of the option will > be higher than its intrinsic value (the proceeds > from exercise). is this becuase of the time value of the option price? since option cost = intrinsic value + time value, i assume this is why you say that price will always be higher than intrinsic value. if true, then your explanation makes sense, since if you are worried about a ddecline in option value, you can just sell it
TheAliMan Wrote: ------------------------------------------------------- > DanLieb, you are absolutely correct, puts are the > exception. Because the stock is bounded by 0, it > means that there is a benefit to early exercise, > and if I recall, the price of an American put > should be higher than that of the European put to > prevent arbitrage so on dividend paying stocks: value american call > value european call value american put > value european call non dividend paying: value american call = value european call value american put > value european put (why is this, if it is in fact true?) make sense?
the show NY Wrote: ------------------------------------------------------- > TheAliMan Wrote: > -------------------------------------------------- > ----- > > DanLieb, you are absolutely correct, puts are > the > > exception. Because the stock is bounded by 0, > it > > means that there is a benefit to early > exercise, > > and if I recall, the price of an American put > > should be higher than that of the European put > to > > prevent arbitrage > > > so on dividend paying stocks: > > value american call > value european call > value american put > value european call > No. value american call >= value european call value american put >= value european call > > non dividend paying: > > value american call = value european call > value american put > value european put (why is > this, if it is in fact true?) > > > make sense? value american put >= value european put