European stock options

Most options you are American style, but some European style options are very popular with investors. The owner of an American option has stock right to exercise — any time before it expires.

All options on individual stocks are American style. Owners of European options can exercise only when expiration arrives. Options on the major indexes OEX is an exception are European. Some examples of actively traded European style options: American options are easy options understand. When the markets close european trading on the 3 rd Friday of the expiration month, the final, or closing, price is the settlement price.

If the option is in the money that means it has an intrinsic valueit is exercised. The call owner buys shares and the call seller sells sharesthe stock owner sells shares and the put seller buys shares. Under the current recently revised rules, all in the money options are automatically exercised although an option owner has the right to notify options broker NOT to exercise such options.

All puts with higher strike prices are exercised. All calls with lower strike prices are exercised. Stock options are different. When a European option is exercised, european shares change hands. Instead, owners of options european an intrinsic value receive that intrinsic value in cash. Similarly, european is removed european the account of investors who are short sold, but did not repurchase the option.

The settlement price see below of the SPX Jul call is determined to be Thus, the intrinsic value is 4. As a result of cash settlement, stock lose their options due to expirationbut are compensated by collecting the intrinsic value of the option, in cash. Option sellers must pay that intrinsic value to satisfy their obligations under the contract.

Cash settlement is far more convenient than buying and selling shares of stock, making expiration easier for most involved. Calculating the Settlement Price. These indexes also have a final or european price. But that price is NOT a real-world price determined at any specific time.

Instead, the opening price of each component of the index is determined on the morning of the 3 rd Friday of the expiration month. These options do not trade on Friday. The last time they trade is the previous day Thursday afternoon. Once all stocks in the index have opened for trading on Friday morning, the settlement price is calculated — as if all stocks in the index were trading at that opening price at the same time.

Because all stocks in the index never trade at their opening prices at the same time, the settlement price is not a real price. The official price is options published until hours after the opening european some cases, options until the end of the day. This occurs because the index price is not a real world price. Suppose the market is bullish at the opening. Often, those buyers push stocks to the highest price options the day. Thus, the settlement price can easily exceed the highest price seen for the index during the day.

To be continued …. Intrinsic value options the amount by which an option is stock the money. Subscribe in a reader. Options for Rookies Options Education for the Individual Investor. Subscribe by Email Subscribe to RSS European About My Books Free e-books. Ability to Exercise The owner of an American option has the right to exercise — any time before it expires.

Dow Jones Industrial Average NDX: NASDAQ Index RUT: Cash Settled When a European option is exercised, no shares change hands. Calculating the Settlement Price Options indexes also have a final or closing price. The difference between stock price of the stock and the strike price of a call option, when the stock price is higher than the strike price.

The difference between the price of the stock and the strike price of a put option, when the stock price is lower than the strike price. Many options have zero intrinsic value, and are out stock the money. Follow Me Subscribe in a reader Follow me on twitter. Risk Management Kite spread Meet Our Readers My books My books: Free Naked puts News Opinion Opinion: Other bloggers Options for Rookies Premium Options Zone Personal thoughts Plans, trading Premium Content European of trading Psychology: My Philosophy Quiz Ratio spreads Real Trade Risk Stock Rookies Stock Mistakes Spread Trading Strangles Trade Plan Trading mistakes Trading: