American Style Stock Options

American Style Stock Options

By www.options-trading-education.com

Trading American style stock
options is not a matter of
Americans being patriotic.

http://www.options-trading-education.com/7064/american-style-stock-options/

It is a matter of adding value to
the options that you buy.


The extra value of American
style stock options over
European style stock options is
that one can execute American
style stock options at any time
during the contract period.


In both American and European
style options trading, one
purchases or sells puts or calls,


employs fundamental analysis
of the underlying stock, and
assesses market sentiment with
technical trading tools.


American style stock options are
available on markets outside of
the United States as well.


There are, in fact, a number of
types of options styles:


American: can be exercised on
any trading day until expiration


Asian: payment is based on
average underlying price over a
stated period of time


Barrier: the price of the
underlying must rise or fall past
a given barrier before exercise is
allowed


Binary: payment is all of nothing
depending on the terms of the
contract


Bermudan: can be exercised
only on specific dates up until
expiration


European: can only be exercised
on expiration


Exotic: generally refers to
options based on complex
financial structures


Vanilla: simply means that the
option is not exotic


Trading American Style Stock
Options


Many beginning traders limit
themselves to purchasing either
calls or puts on stocks.


The trader pays for the right to
buy in the case of a call or sell in
the case of a put.


The worst that a trader can do
in either case is lose the price of
the contract.


The best that a trader can do is
to execute or exit the contract
at the optimum time.


In both American style options
trading and European style
options trading a trader can
simply sell the contact for its
current value.


This value obviously rises with
price of the underlying in a call
contract and rises with the fall
of the underlying in a put
contract.


But, what if the trader wants to
take possession the stock?


This happens with investors
who see an opportunity to get
into a stock a good price.


The investor can execute the
contract in an American style
contract and then purchase puts
on the stock in order to protect
his position.


This feature is not available in
European style options.


Likewise in a put contract an
investor may have a stock that
has risen rapidly.


He may want to protect himself
against a fall in stock price.


Using American style stock
options he can get out of the
stock when it falls and still sell
at the original price,


called the strike price, and not
have to wait with his money
tied up until expiration of the
options contract.


The fact that European style
options limit execution of
options trades can be a major
factor in which style to trade.


Which Is the Way to Go?


The most important factors in
options trading are the same as
in trading stocks directly.


Know or learn the fundamentals
and follow the market with
technical indicators.


Stick with practical options
trading tactics.


If the inability to execute an
options contract midway
through the contract period is
important, avoid European style
and stick with American style
stock options.


Otherwise, simply exit your
position at the most profitable
moment by executing the
opposite trade.


American Style Stock Options

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American Style Stock Options