What is an American Option?
American options are different to European style options (Vanillas) in that the contract buyer has the right to exercise the option at any time before maturity (t=T). This additional privilege of an American option must come at a cost – know as the early exercise premium. Therefore, the value of an American put option in relation to a vanilla must satisfy How do the prices compare? Below are the values of an American (red) and European (blue) Put option prior expiry as a function of a non dividend paying asset price S are shown. Notice that cost for the American Put more than its European counterpart when in-the-money, and the two curves tend to fall on top of one another when out-of-the-money. This is cause the early exercise premium tends to zero the more out-of-the-money it gets since the option is unlikely to be exercised early. Therefore, a deep out-of-the-money American and Put option have almost the same value. The freedom to exercise an American option whenever the holder wishe
The American option is an investment opportunity that is somewhat similar to the European-style option, but is characterized by one important difference. With American options, it is possible to exercise the option at any point prior to the expiry date. This is different from the European style of stock option, which can only be exercised on a specified date. It is important to remember that the American option has the same potential for cash flows as their international counterparts featuring the same underlying, strike price, and expiry date. The key to maximizing the amount of return on American stock options is to watch the dividends closely. If there are no dividends paid on the underlier from the date of acquisition to the expiry date, then it is a pretty safe bet that the option value of the option will be more than the intrinsic value. For this reason, many investors who choose to deal with an American option will hold the option all the way to the expiry date. At the same time
” The American option is an investment opportunity that is somewhat similar to the European-style option, but is characterized by one important difference. With American options, it is possible to exercise the option at any point prior to the expiry date. This is different from the European style of stock option, which can only be exercised on a specified date. . It is important to remember that the American option has the same potential for cash flows as their international counterparts featuring the same underlying, strike price, and expiry date. The key to maximizing the amount of return on American stock options is to watch the dividends closely.
