Early Exercising

This is somewhat similar to the previous post on theta. When is it optimal to exercise an American option early?

- For call, you never exercise early if the underlying pays no dividend; reason being that for a call option, early exercise means we are to pay cash earlier. Considering the time value of money, early exercise is not as good as the alternative strategy of shorting the asset. If it does pay dividend, however, early exercise may be optimal just before a dividend is paid out.
- For put, things are more messy....If the option is deep in the money, then the asset price movement is not as a dominant factor as the time value of money because by early exercise we receive cash early -> early exercise is likely to be feasible.

Summary:
Exercise Am. call early if the call is deep ITM and dividend yield is high
Exercise Am. put early if the put is deep ITM and rate is high

http://faculty.chicagobooth.edu/robert.novy-marx/teaching/35100/Lectures/lec05.pdf