American option, Portfolio Management

It is an option that can be applied anytime in its lifetime. American options permit option holders to implement the option at any time previous to and including its maturity date, therefore increasing the value of the option to the holder relative to European options, which may only be applied at maturity. Most of the exchange-traded options are American.

As investors have the autonomy to exercise their American options at any point of time during the life of the contract, they are more precious than European options, which may only be exercised at maturity. Take this example: If you purchased a Ford March Call option in March 2005, completed in March of 2006, you would have the right to use the call option at anytime until its expiration date. If the Ford option been a European option, you would only use the option at the expiry date, in March 2006. During the year, the share price would have been highest optimal for use in December of 2005, but you would have to wait to use your option until March 2006, where it could be out-of-the-money and almost of no value.

Posted Date: 8/4/2012 6:56:40 AM | Location : United States

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