How do you trade strats with american options?

M

maxima120

If an American option can be exercised at any time - how do you trade anything which includes a short leg which is ITM or ATM ?

I understand a mad trader or if a mistake has been made can even exercise OTM option.. right? why not...

So... how do you guys construct strategies? or you just don't do that with the americans.... what do you use the for then??

Hope my questions make sense :)
 
Just because an option can be exercised at ay time doesn't mean that it would be. There are specific economic reasons for exercising an option early so as long as you keep an eye on those factors (e.g. ex-div date when you are holding a short ITM call) you've got nothing to worry about.
 
Sorry to be not too specific. But I was talking about CME options on futures.. there is no dividends. I mean if the underlying price is 1500 and you have sold a call at 1400 why the buyer will not exercise it immediately?
 
OK my options are a bit rusty may be I am just being nuts..

Here is the example. ES (CME SP500 e-mini futures) @ 1500.

I sell a butterfly

BUY CALL 1 @ 1400
SEL CALL 2 @ 1500
BUY CALL 1 @ 1600

price moves to 1501 next minute or HV jumps up 3%... Buyer of the CALL 1500 thinks hey I am in the money! its Friday. lets get girls and bubbly and celebrate... wait a minute.. I need some cash why don't I exercise my lovely call option? caching... my fly goes out of the window... or does it?
 
Quote from maxima120:

OK my options are a bit rusty may be I am just being nuts..

Here is the example. ES (CME SP500 e-mini futures) @ 1500.

I sell a butterfly

BUY CALL 1 @ 1400
SEL CALL 2 @ 1500
BUY CALL 1 @ 1600

price moves to 1501 next minute or HV jumps up 3%... Buyer of the CALL 1500 thinks hey I am in the money! its Friday. lets get girls and bubbly and celebrate... wait a minute.. I need some cash why don't I exercise my lovely call option? caching... my fly goes out of the window... or does it?
More...

Look up extrinsic value/time value. The call is worth more to close than to exercise. I don't understand why this is so difficult for you to grasp. There isn't a lot of difference in the valuation of short-duration Euro and Amer options at these rates.

You are LONG the call fly. The call is going to have some value even in the last moments of the last-trading day.

As an example; the SPY Mar8 155.5C went out at 0.01bid and fourteen cents out of the money. Would you exercise an OTM call on SPY on Friday?
 
sorry may be this is the problem here... I thought if I sell a fly someone might have bought a fly, but also it could be 4 different people involve - 2 sold me calls and 2 bought calls from me... is this not the case? are you saying that strat orders going to be matched against strat orders only?

in that case I can see why the other side will not exercise...

is it something I can read in CME docs? I couldn't find anything indicating the assertion above.
 
@caveman... I appreciate that you might know what Volga is or whatever... but honestly if you don't have anything to add to the discussion why don't you go and have a beer or something...
 
Quote from maxima120:

@caveman... I appreciate that you might know what Volga is or whatever... but honestly if you don't have anything to add to the discussion why don't you go and have a beer or something...
More...
I don't drink... I substitute sbux...

It rarely pays to excise options early..

Basically the almost always trade over intrinsic......

Maybe when the stock is hard to borrow... or deep in the money around dividend......
 
I trade (personal and OPM) maybe 10k flies a month and the vast majority (in contract number) are american. I get assigned a few times per year. Perhaps 200 contracts.
 
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