Question

True or false: It is never optimal to exercise an American put option (on a non-dividend paying stock) early.

Group of answer choices

True

False

Answer 1

Unlike European put option, the american option holder has the option of exercising before the expirty date. However, it is not advisabel to exercise it early if it is non-dividend paying. The option has intrinsic value and time value. The IV is always greater than zero. Cash has time value and one is always better off by delaying the exercising as the money could be used to earn interest. So a positive IV plus time value implies that it is better to sell the option rather than exercising early.

Answer is True