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American style options are inherently more valuable. Imagine you had options on a stock that experienced a sharp but possibly temporary move. As a holder of an
by sokoloff 2y ago
American style options are inherently more valuable. Imagine you had options on a stock that experienced a sharp but possibly temporary move. As a holder of an American style option, you could benefit from that temporary move, making it more valuable.
- im3w1l 2y agoThe way the market is typically modeled, temporary moves are not a thing.
- sokoloff 2y agoThe way the market actually exists, temporary moves are definitely a thing.
- FabHK 2y agoBy put-call parity, C - P = S - df K, thus C = S - df K + P > S - K. This is contingent only on the discount factor df being <= 1, and P >= 0, which is basically always the case. Thus, the value of the call exceeds the exercise value, making exercise never optimal. Exercise for the reader: Understand why the same argument doesn't work for puts (or calls on dividend paying stocks).