Why Are American Options Rarely Exercised Early in the Equity Market?

American options are rarely exercised early because doing so means forfeiting the remaining time value (extrinsic value) of the option. The option is worth more when sold on the open market than when exercised, as the sale captures both the intrinsic and extrinsic value.

Early exercise is typically only rational for a deep in-the-money call option just before an ex-dividend date.