Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Tommaso who wrote (94329)	2/2/2002 1:46:16 PM
From: tom r. phillips	Read Replies (1) \| Respond to 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

To: Tommaso who wrote (94329)	2/2/2002 2:28:12 PM
From: Don Lloyd	Read Replies (1) \| Respond to of 132070

Tommaso - Well, any other options I have bought, since they were American-style and could be exercised any time, had a time premium that decayed and thereby added to the risk of the option. The European-style LEAPS have developed exactly the opposite valuation because they can't be exercised until expiration, and therefore the "decay" is in my favor. You may not be reflecting what you mean by what you say here, but it is always the option or leap seller that is favored by time decay. Of course, your own expectations will have to determine whether a given time premium is too much or too little, whether you are buying or selling. Good Luck, Don