Effect of option's time value on decision of exercising or selling option

Abstract

Option's time value is often deemed as positive by some scholars. Could the time value of option be negative? The paper makes profound analysis and gives a definite answer. Given the time value is positive, should the option be exercised? The answer is NO, for selling option may be better than exercising it. However, for some reasons, selling option is unavailable. As long as the time value is less than the expected intrinsic value loss, exercising option is wise. For American option, its time value disappears at the expiration date while existing intrinsic value can be obtained. The other circumstance is that if underlying assets are going through cash distribution, the value of American option would be higher than European option. Vice versa, if stock price falls, option carriers still have to bear the loss. Therefore, if the time value when you exercise option is less than the dividend or bonus, it would be better for carriers of American option to exercise option before payment of the dividend or bonus.