american style stock options

American Style Stock Options

By www.options-trading-education.com

http://www.options-trading-education.com/

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

Trading American style stock options is not a matter of

Americans being patriotic.




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.



http://www.options-trading-education.com/7061/european-style-stock-options/


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.



http://www.options-trading-education.com/7043/execution-of-options-trades/


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.



http://www.options-trading-education.com/7040/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.



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