Taxation and the Early Exercise of Call Options

22 Pages Posted: 13 Jul 2010

See all articles by Karen Alpert

Karen Alpert

University of Queensland - Business School; Financial Research Network (FIRN)

Date Written: 2009-10

Abstract

Prior studies of call option early exercise either ignore personal taxes or simplify the impact of taxation. When making an early exercise decision, the option holder should compare the after-tax cash flows from exercise with the after-tax cash flows from selling the option. Due to the differential taxation of option and share transactions, it is possible for exercise to be wealth-maximizing after tax even when it would not be the rational decision on a before-tax basis. By incorporating personal taxes on the option, underlying share and dividend this paper shows that tax can potentially explain a large portion of early exercise events classified as ‘irrational’ in previous studies.

Suggested Citation

Alpert, Karen, Taxation and the Early Exercise of Call Options (2009-10). Journal of Business Finance & Accounting, Vol. 37, Issue 5-6, pp. 715-736, June/July 2010, Available at SSRN: https://ssrn.com/abstract=1639213 or http://dx.doi.org/10.1111/j.1468-5957.2010.02183.x

Karen Alpert (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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