American versus European options - Revision history

Dirkjan at 19:23, 27 August 2020

2020-08-27T19:23:21Z

Dirkjan: Replaced content with "American versus European options Category:finance"

2020-08-27T18:38:30Z

Replaced content with "American versus European options Category:finance"

Dirkjan: Created page with "An American option can be exercised at any time prior to its expiration, while a European option can be exercised only at expiration. * The possibility of early exercise makes..."

2020-08-25T07:21:22Z

Created page with "An American option can be exercised at any time prior to its expiration, while a European option can be exercised only at expiration. * The possibility of early exercise makes..."

New page

An American option can be exercised at any time prior to its expiration, while a European option can be exercised only at expiration.
* The possibility of early exercise makes American options more valuable than otherwise similar European options.
* However, in most cases, the time premium associated with the remaining life of an option makes early exercise sub-optimal.
* While early exercise is generally not optimal, there are two exceptions:
** One is where the underlying asset pays large dividends, thus reducing the value of the asset, and of call options on it. In these cases, call options may be exercised just before an ex-dividend date, if the time premium on the options is less than the expected decline in asset value.
* The other is when an investor holds both the underlying asset and deep in the money puts on that asset, at a time when interest rates are high.

The time premium on the put may be less than the potential gain from exercising the put early and earning interest on the exercise price.
[[Category:finance]]

← Older revision		Revision as of 18:38, 27 August 2020
Line 1:		Line 1:
−	An American ~~option can be exercised at any time prior to its expiration, while a~~ European ~~option can be exercised only at expiration.~~	+	American versus European options
−	* The possibility of early exercise makes American options more valuable than otherwise similar European options.
−	* However, in most cases, the time premium associated with the remaining life of an option makes early exercise sub-optimal.
−	* While early exercise is generally not optimal, there are two exceptions:
−	** One is where the underlying asset pays large dividends, thus reducing the value of the asset, and of call options on it. In these cases, call options may be exercised just before an ex-dividend date, if the time premium on the options ~~is less than the expected decline in asset value.~~
−	* The other is when an investor holds both the underlying asset and deep in the money puts on that asset, at a time when interest rates are high.
−
−	~~The time premium on the put may be less than the potential gain from exercising the put early and earning interest on the exercise price.~~
	[[Category:finance]]		[[Category:finance]]

← Older revision		Revision as of 19:23, 27 August 2020
Line 1:		Line 1:
−	American ~~versus~~ European options	+	An American option can be exercised at any time prior to its expiration, while a European option can be exercised only at expiration.
		+	* The possibility of early exercise makes American options more valuable than otherwise similar European options.
		+	* However, in most cases, the time premium associated with the remaining life of an option makes early exercise sub-optimal.
		+	* While early exercise is generally not optimal, there are two exceptions:
		+	** One is where the underlying asset pays large dividends, thus reducing the value of the asset, and of call options on it. In these cases, call options may be exercised just before an ex-dividend date, if the time premium on the options is less than the expected decline in asset value.
		+	* The other is when an investor holds both the underlying asset and deep in the money puts on that asset, at a time when interest rates are high.
		+
		+	The time premium on the put may be less than the potential gain from exercising the put early and earning interest on the exercise price.
	[[Category:finance]]		[[Category:finance]]