Question

Briefly explain why it is not optimal to exercise an American call option on a non-dividend paying stock before the expiration date.

Answer 1

The number one reason why you would not want to exercise an in-the-money American call option is there is still some time value left in the option. If you exercise the call option early you will have to pay for the time value of the option.

And, early exercise means you will have to take your money out of your savings account (which was earning some interest) and buy the stock. So, you would lose the interest otherwise you could have earned.

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