How Does Early Exercise Affect the Time Value of an American Option?
When an American option is exercised early, the buyer immediately forfeits all of the remaining time value (extrinsic value) of the option. The time value is lost because the contract is terminated before its scheduled expiration.
This is why early exercise is generally considered financially sub-optimal, as the buyer only receives the intrinsic value.
Glossar
Early Exercise
Trigger ⎊ Early exercise, within cryptocurrency options and financial derivatives, denotes the right ⎊ but not the obligation ⎊ of the option holder to realize the intrinsic value of the contract prior to its scheduled expiration date.
Time Value
Component ⎊ Time value, also known as extrinsic value, is a component of an option's premium that reflects the probability of the underlying asset's price moving favorably before the option expires.
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.