How Does Dividend Payment Affect the Early Exercise Decision for a Call Option?

A large, impending dividend payment can make the early exercise of an American call option rational. When a stock goes ex-dividend, its price typically drops by the amount of the dividend.

If the dividend is large enough, this price drop could cause the call option to lose more value than the value of the dividend received. By exercising just before the ex-dividend date, the call holder can purchase the stock, receive the dividend, and avoid the potential loss in option value.