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Politics : Ask Michael Burke
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To: Tommaso who wrote (94329)2/2/2002 1:46:16 PM
From: tom r. phillips  Read Replies (1) of 132070
 
thanks, Tommaso. your post caused me to look up American vs. European exercise in Larry McMillan's options book. he notes that because the European option can only be exercised on expiration day, deep in the money European puts will be cheaper than their American counterparts and will trade at a discount, etc. He writes, "If a portfolio manager buys puts to protect his portfolio and the market crashes, the puts might be deeply in the money. If these puts have a Eur. exercise feature, they would be selling at a deep discount and therefore would not have afforded all the price protection that the portfolio manager had been looking for." so, the tradeoff to having more cash at risk in your deep in the money puts is that you've taken advantage of the discount for yourself. but, if the Dow crashes from here soon, i suppose the discount would become a bit larger and you might not get full benefit of the crash (at least in the short run and especially if there's a quick rebound).

Tom
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