Why Would an Investor Choose to Exercise a Deep-in-the-Money Option Early?

An investor might exercise a deep-in-the-money (DITM) American-style option early for several reasons. One common reason is to capture an upcoming dividend payment on the underlying stock.

Option holders are not entitled to dividends, so an investor might exercise a DITM call option just before the ex-dividend date to become a shareholder and receive the dividend. Another reason could be to free up capital or avoid the risk of the remaining time value decaying to zero, especially if the option is illiquid and difficult to sell at a fair price.