How Does Early Exercise Affect the Time Value of an American Option?

Early exercise of an American option immediately eliminates its remaining time value. Time value is the portion of the option's premium that is attributed to the possibility of the option moving further into-the-money before expiration.

By exercising early, the option holder realizes the intrinsic value immediately but forfeits any potential future gains from price movement or the remaining time decay. Therefore, early exercise is generally only rational for American call options on non-dividend-paying assets under very specific circumstances.