Commission to sell an option usually close to a buck.
Commission for exercise is $15 per exercise some places.
For one contract size, that is hard to make up with profits.
From: "Jacobson, Alex" <ajacobson@ise.
To: "OptionClub@
Sent: Friday, July 10, 2009 1:23:12 PM
Subject: Re: [TheOptionClub.
American versus European spreads. The simple answer is yes an American spread with an ITM short leg would have a risk of early exercise.
This begs the question of why do American spreads at all.
First early exercise might be a good thing taking you out of your short leg with the expectation that the long leg would be in a better position
Or the recognition that American spreads earn more absolute premium overall. The market places a value of the benefit/risk of early exercise so an American spread that was exactly like a European spread ( the all things being equal issue - which is never really the case) the American spread would net a better premium as the market would reward you for assuming the risk of early exercise. The quick dirty answer is American options are more valuable than European so in simple terms you are paid to assume the risk of early exercise.
There are other issues relating to vol. skew in American versus European, but that is a very long answer.
A simple view is that it is easier to autopilot European spreads, but you get paid more on American. Is it worth it to you to get paid extra to monitor ?
ISE educational presentations are now available via the iTunes Music Store. Visit Option Education @ Your Fingertips for free ISE podcasts. Sent from my Blackberry. Alex Jacobson ajacobson@ise.
From: OptionClub@yahoogro
To: OptionClub@yahoogro
Sent: Fri Jul 10 11:44:53 2009
Subject: [TheOptionClub.
I want to throw out a question that might sound kind of basic, but I want to confirm what I am thinking.
Lets say that I am putting on a spread (regardless of the type) on a short time horizon (eg next expiry). If the spread is an American option then you run the risk of getting an exercise against you no? After all if the option is in the money and it looks like the market might drop I might be tempted to exercise and lock in profit.
However, if I base a spread on European options then I cannot have an execution against me since exercises are only possible at the end.
Please note I am not talking about Bermuda or other exotic options, and let's not get into the discussion of whether or not the exercise could or should happen.
Thanks
Christian Gross
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