Series 7 practice questionmediumOptions — Early Exercise
Under which circumstance would early exercise of an American-style call option most likely occur?
- AWhen the option is out-of-the-money
- BJust before the underlying stock goes ex-dividend✓ Correct answer
- CWhen the option has significant time value remaining
- DWhen implied volatility is very high
Explanation
Why B — Just before the underlying stock goes ex-dividend
Early exercise of a call option is most likely just before the ex-dividend date because the call holder may want to own the stock to receive the dividend. After the ex-date, the stock price typically drops by the dividend amount, reducing the call's value. Early exercise forfeits remaining time value, so it only makes sense when the dividend exceeds the time value.
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