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Appreciate some help with a problem i am facing

OK, so first I found a put and call option with same strike price and maturity for both American-style and European-style options. I selected the ones closest at-the-money with a maturity of 36 days. Data looks like this for the European:

S 611,1 : X 610 : R 0,09 : T 0,098630137

call price 7,85 : put price 0

And for the American:

call price 11,7
put price 12

theoretical minimum put price: 5,209167313

My question is: What is the reason for the difference between American style and European style options when they have the same exercise price and maturity?

Appreciate all help! Thanks!

Tom

  • Where did you get this data? Options pricing models usually result in little difference between American/European-style contracts. – Jason R Feb 26 '12 at 18:02
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The key difference between American and European options relates to when the options can be exercised:

  • A European option may be exercised only at the expiry date of the option, i.e. at a single pre-defined point in time.
  • An American option on the other hand may be exercised at any time before the expiry date.

This is why American options are in general more expensive because the are exercisable any time.

  • Hi AlexR. Thanks for answering. Yes I knew that, but was hoping it was something more to it. If I were to interpret my results, it seems kinda week to only point to the exercise dates. Do you know of anything else that might trigger the difference? Thanks, Tom – Tom Clever Feb 26 '12 at 18:54
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    Jason is right: How did get or calculate the data. The delta between the two prices seems way to high, in particular considering the short T period. By the way a put price of 0 seems to be unrealistic for an option which could get into the money very soon. – user5838 Feb 26 '12 at 19:01
  • To be honest I got it myself from CBOE website. It is for a tutorial I am having tomorrow. " : Consider a put and call option with same strike price and maturity for both American-style and European-style options. Choose options that are closest at-the-money and choose a maturity between 1 month and 1 year (for all options used). For the interest rate you can use the ‘interest rates’ market data provided by Bloomberg (bloomberg.com/markets/rates/index.html). Select a yield of an appropriate Treasury that has a maturity closet to that of the option" – Tom Clever Feb 26 '12 at 19:13
  • Using ‘delayed quotes classic’ tool under the ‘Quotes&Data’ tab at the CBOE website www.cboe.com, download prices for the selected put and call, by entering the symbol codes OEX or XEO and checking the choice ‘List all options, LEAPS, Credit Options & Weeklys if available. Question: "Find the difference between the prices of American-style and European-style options, of same exercise price and maturity. Interpret the results." – Tom Clever Feb 26 '12 at 19:16
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    Except for the fact that the European put price is unrealistically low and should be at least 4 USD, the only thing that comes to my mind is dividends. Only if the underlying is a dividend paying stock and the dividend payment is in the next 36 days, a significant difference between American and European put prices is realistic. – user5838 Feb 26 '12 at 19:38
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An American option gives you the opportunity to capture a dividend payment. e.g. a $1 dividend is ex-div prior to the option expiration. The call buyer may exercise early and get that dividend as well. This is the one difference in value I can cite.

There may be other reasons for early exercise having value, I'm just not aware of them.

  • As far as I know, the one you cited is the only real reason to exercise early. Otherwise, you're sacrificing the time value that the option holds based upon the time until expiration; as long as the market is liquid enough (i.e. the bid/ask spread isn't too wide), then you should be able to do better by just selling the option, capturing both the intrinsic value and time value. This of course assumes that the option is in the money, but you probably wouldn't be exercising it if it wasn't. – Jason R Feb 27 '12 at 2:39
  • Ok. Thanks guys! If I learn something useful today I will post it! Have a good day :D – Tom Clever Feb 27 '12 at 13:13

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