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Option styles

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Option styles
The purchaser of a European-style Option has the right to Exercise it on a predetermined Expiry Date. In contrast, the Holder of an American-style Option has the right to Exercise it at any time during its lifetime, up to and including its Expiry Date. This flexibility means there is a greater probability of an American-style Option being exercised than the corresponding European-style Option with the same strike. Hence the early Exercise feature of an American Option adds value and makes it the more expensive of the two. Most Exchange-traded options are American-style. Further variations on these styles also exist. A Bermudan Option, so called because it falls between American- and European-style options, has more than one possible Exercise date. For example, the Holder of a Bermudan Option with a two-year maturity might have the right to Exercise it every quarter or half year during the life of the contract. Bermudans are also known as limited Exercise or semi-American-style options. Another twist is the deferred payout Option, a variation on American-style options in which the Option can be exercised at any time during the Option’s life, but the payout is delayed until the Expiry Date. With the similar Shout option, the purchaser can lock in a profit at any time, but retains the right to profit from further favourable moves.

See also American-style Option, Bermudan Option, deferred payout Option
Posted by  Privatebanking.com
 
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