How does the tool handle the possibility of early exercise?
For call options on dividend paying stocks there may be times, just prior to ex-dividend dates, when it is worthwhile to exercise the call before expiration. Also prior to ex-dividend dates, European calls may be worth less than their intrinsic value – this cannot happen for American calls. So for dividend paying stocks the American call may be worth more than the European call – it has an early exercise premium, the size of which varies according to the time to ex-dividend date and other factors. The binomial American model is able to handle this situation; the Black-Scholes model, however, cannot as it only takes into account the position at expiration. The situation is different for put options. Even on non-dividend paying stocks, the fair value of a deeply in the money European put can be less than its intrinsic value (due to the carrying costs of the positions which arbitrageurs undertaking conversions would have to carry through to expiration). American puts, on the other hand, c
