What Is the Concept of ‘Opportunity Cost’ in the Context of Early Exercise?
Opportunity cost in early exercise is the value that is forfeited by choosing to exercise the option now instead of holding it. For an American call, the opportunity cost is the remaining time value that is lost.
For a put, it is the potential for the underlying asset to fall even further, yielding a greater profit, offset by the interest that could have been earned on the exercise proceeds.
Glossar
Opportunity Cost
Sacrifice ⎊ The concept of opportunity cost within cryptocurrency, options, and derivatives fundamentally represents the forgone benefit from selecting one strategy over another.
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.
Opportunity Cost of Holding
Cost ⎊ The Opportunity Cost of Holding a cryptocurrency represents the forgone return that could have been earned by investing the capital in the next best alternative asset or deploying it in a yield-generating protocol.