The American option represents a type of financial contract that offers the holder the opportunity to exercise his or her right at any time before expiration. Unlike European options, which can be exercised only on the expiration date, American options grant more flexibility, allowing the investor to act at any time during the life of the contract.
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Why are American options more valuable than European options?
American options tend to have a higher value than European options with similar characteristics, precisely because of the greater freedom of temporal choice they give the investor. This additional flexibility allows the holder to react promptly to significant changes in market prices. The U.S. option offers two relevant advantages: it allows the payment of the exercise price to be postponed, and it preserves the element of protection, typical of any option. The ability to exercise the right at any time makes American options particularly popular with investors who want to maintain agility in their trading decisions.
When is it convenient to exercise an American call-type option?
As a rule, it is not convenient to exercise an American call-type option early. This is because, by holding the option until expiration, the investor can benefit from both intrinsic and time value. If a holder of an American call wishes to close his position, he often finds it more advantageous to resell the option in the market than to exercise it. In this way, he collects not only the value associated with the difference between market price and strike price, but also the remaining time value of the option. However, there is a significant exception: near the date of payment of a dividend, it may become worthwhile to exercise the option. This happens if the value of the dividend exceeds a certain threshold, allowing the holder to buy the underlying stock and then cash in the dividend.
When is it convenient to exercise an American-type put option?
In the case of American-style put options, the situation is different. If the option has a high intrinsic value, the investor may prefer to exercise it rather than wait in order to secure the gain. This decision depends on the value that the market places on the underlying asset and whether there is a need to cash in the profit. While for American calls the incentive to postpone exercise is more pronounced, with puts the urgency to cash in becomes a more important variable.
Conclusions on American options and their use
Options represent a strategic choice for investors seeking flexibility and potential gain. With the ability to exercise their right at any time, American options offer unique opportunities, adapting to different market scenarios. Their structure makes them particularly useful tools for those who wish to actively manage their investments and take full advantage of price fluctuations. Compared to European options, American options provide greater decision-making freedom, which is why they continue to be popular among experienced investors.
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Giuseppe Fontana
I am a graduate in Sport and Sports Management and passionate about programming, finance and personal productivity, areas that I consider essential for anyone who wants to grow and improve. In my work I am involved in web marketing and e-commerce management, where I put to the test every day the skills I have developed over the years.
