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.
Glossar
Early Exercise
Right ⎊ Early Exercise is the contractual privilege granted to the holder of an American-style option, allowing them to invoke the rights of the contract at any point before the specified expiration date.
Early Exercise Decision
Condition ⎊ An early exercise decision is a critical choice for holders of American-style options, where the option can be exercised at any time before its expiration date.
Payment
Settlement ⎊ Payment within cryptocurrency, options trading, and financial derivatives represents the actual transfer of value, typically digital assets or fiat currency, to fulfill contractual obligations arising from a trade or contract execution.