Why does a Bermudan option have a higher implied volatility than its European counterpart?

Question

I get that the premium for an earlier exercise should be higher to compensate the seller but intuitively you would think that the spot has "less room to run" in a potentially shorter period of time (due to a potential earlier exercise compared to the European counterpart).... am i thinking about this correctly? What am I missing?

D Stanley · Answer

Optionality always benefits the holder of the option (since the payoff will be the higher of exercising the option or not), so an option with more "optionality" (in this case, more opportunities to choose exercise) will always be worth more.

I don't see where your question has anything to do with "implied" volatility.

Why does a Bermudan option have a higher implied volatility than its European counterpart?

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