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**yarita** · 05-06-2010, 01:34 AM

If we are talking options in common stock , there may be many opportunities where a real investor might exercise early based on an assessment of the company, industry trends or even recent events. The American option holder may have the chance to exerercie and sell a stock for gain while the European option holder finds no value in the exercise as the stock goes back down prior to expiry.

In fact your assessment that you never exercise an option before expiry day would be true only for stable or rising stocks (if you have a purchase option)

Under a bunch of assumptions you can show that the present value of the American option is always greater than the money you could earn by exercising it, when the stock pays no dividends and the risk-free rate is 0, i.e. no rational investor would exercise the option prior to expiration.

Obviously, several of these assumptions aren't actually true. They are useful mathematical constructs.

05-06-2010, 01:34 AM	#10
yarita Join Date Oct 2005 Posts 661 Senior Member	If we are talking options in common stock , there may be many opportunities where a real investor might exercise early based on an assessment of the company, industry trends or even recent events. The American option holder may have the chance to exerercie and sell a stock for gain while the European option holder finds no value in the exercise as the stock goes back down prior to expiry. In fact your assessment that you never exercise an option before expiry day would be true only for stable or rising stocks (if you have a purchase option) Under a bunch of assumptions you can show that the present value of the American option is always greater than the money you could earn by exercising it, when the stock pays no dividends and the risk-free rate is 0, i.e. no rational investor would exercise the option prior to expiration. Obviously, several of these assumptions aren't actually true. They are useful mathematical constructs.
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