If VIX is a measure of implied volatility in S&P options...

[TrustyJules]

@Sig - You persist (for the third time) in putting words in my mouth:

You're saying that when an event happens that will inevitably lead to volatility on VIX suddenly going higher, the bid/ask spread becomes so wide that an offer won't be hit for less than intrinsic.

The fact you feel the need to utilise expletives like 'moron' and 'fuck' tells me enough. Thank you for your replies, I think we can agree that this discussion is pointless to continue. I wish you well in your trading,

 

[Sig]

@Sig - You persist (for the third time) in putting words in my mouth:



The fact you feel the need to utilise expletives like 'moron' and 'fuck' tells me enough. Thank you for your replies, I think we can agree that this discussion is pointless to continue. I wish you well in your trading,

Dude this isn't a debate you "win" or need to save face in. You've been repeatedly told by a bunch of people on this thread each of whom has significantly more trading experience and finance education that you, that your understanding of options is simply incorrect and incomplete. That's a learning experience for you, and the measure of what kind of person you are can be seen in your ability to take it as such or decide to get all hypersensitive and continue to argue as if you know wtf you're talking about and everyone else in the world with experience and education in this area is wrong. You need look no further than @Maverick74 and my discussion earlier in this thread to see how mature adults discuss and learn from that discussion. Two free lessons for you in one thread!

 

[raf_bcn]

Hi

When in a thread participates people like @Martinghoul @Sig and especially @Maverick74 and @JackRab it is better to shut up and listen.

I want to say something because the theory sometimes desviates us from the reallity.

the only difference between the price of a european option and an american option involves stocks with dividends where early exercise is optimal, otherwise they'll always price exactly the same 100% of the time and it's never optimal to exercise an american option early.

1_ ITM american calls are only early exercicsed the day before the stock goes ex dividend. Otherwise the holder will lose the dividend value.
But ITM american puts are exercised more frequently, because yes it is optimal for the holder to exercise an american ITM put option early.
And that is because of the interest, as @Maverick74 said.
That is a fact, and is also true that this happens more frequently as the expiration day approaches.
I have experimented that hundreds of times, so that is reallity.


2_ American style options and European style options of course have differences in the price. An ITM european put will discount the interest, so it would be priced sometimes below the intrinsic value but with an american one it is not possible, because it would be very easy to buy and early exercise the same day.


That is my opinion and my experience. But yes I reconize I am a newbie and still learning.

 

[TrustyJules]

@Raf Only Sig is being obtuse here in insisting I am saying stuff I am not. In fact most of what Sig says I agree with except that he's making points on stuff I never claimed in the first place. As he is now in full troll-bully mode trying to provoke a flame war, there is no point in talking to him. However, As my own words appear not to come across let me give a literal quote from Jeff Augen p. 484 Option trading strategies:

"35. Suppose an investor is long calls on an index with European expiration rules. Can you envision issues related to the European-style expiration that could affect liquidity or bid-ask spreads?

Answer: When investors anticipate that a sudden large move will be short-lived, bid-ask spreads and liquidity issues can surface, making it difficult to close an option position. This problem is well-known to investors who trade options on the CBOE Volatility Index (VIX). The VIX tends to rise sharply in a market decline and fall when the market stabilizes. In principle out-of-the-money calls should gain in value during a market drawdown.

However, the anticipation of a sharp decline in the index as the market regains stability after a sudden drop can create price distortions for options that cannot be exercised. Consider, for example, the thought process of an investor who is short calls that suddenly move in-the-money as the index rises during a market crash. Knowing that the VIX is likely to decline as the market stabilizes, and that implied volatilities of VIX options will ultimately fall, the investor will likely hesitate before closing the position at a loss. This approach could not be taken if the calls were immediately exercisable.

Unfortunately, because they are not, bid-ask spreads tend to widen by a surprising amount and liquidity becomes an issue. These factors ultimately limit the value of out-of-the-money VIX calls as a hedge against a market crash. Some of the same effect can be seen with thinly traded equity options. Holders of long puts often find it difficult to sell their options for a fair price during a rapid market decline because short sellers of the same puts are unwilling to overpay to buy them back until volatility stabilizes. However, unlike European options that cannot be exercised before expiration, American options can never be worth less than the amount that they are in-the-money. This fact limits the size of the distortion"

I am sure Elite-trader option Guru status trumps bibliographic quotes ;-) on here. It is of no consequence. Mere assertions and boasts of 'nailing intrinsic' (which is besides the point completely) in a post decorated with expletives compared to a reasonable argument documented with sources remains more relevant to me no matter how relevant and insightful other posts of the same person may be.

 

[newwurldmn]

@Raf Only Sig is being obtuse here in insisting I am saying stuff I am not. In fact most of what Sig says I agree with except that he's making points on stuff I never claimed in the first place. As he is now in full troll-bully mode trying to provoke a flame war, there is no point in talking to him. However, As my own words appear not to come across let me give a literal quote from Jeff Augen p. 484 Option trading strategies:



I am sure Elite-trader option Guru status trumps bibliographic quotes ;-) on here. It is of no consequence. Mere assertions and boasts of 'nailing intrinsic' (which is besides the point completely) in a post decorated with expletives compared to a reasonable argument documented with sources remains more relevant to me no matter how relevant and insightful other posts of the same person may be.

In the effort to dumb down a market effect, the quote is conflating two issues that are unrelated.

Technically an option's underlying is the forward. For most underlyings the forward is close to the spot price. Only in the VIX is the forward often way off from the spot price and this is because each maturity is derived by a completely different set of options - they don't have to have any relation to eachother other than some arbitrage free pricing on the listed surface.

While he says the European-ness of the call means a lower expected VIX level in the future, this is because that call is really pricing to the forward and that forward isn't rallying as much because the market is expecting the vix to go down in the future so the calls that price off that forward don't rally.

This isn't a European issue as much as it's how the April VIX is actually a completely different underlying than the May VIX whereas the Sep ES is basically the same as the Jun ES.

 

[FSU]

Hi
1_ ITM american calls are only early exercicsed the day before the stock goes ex dividend. Otherwise the holder will lose the dividend value.
But ITM american puts are exercised more frequently, because yes it is optimal for the holder to exercise an american ITM put option early.
And that is because of the interest, as @Maverick74 said.
That is a fact, and is also true that this happens more frequently as the expiration day approaches.
I have experimented that hundreds of times, so that is reallity.


That is my opinion and my experience. But yes I reconize I am a newbie and still learning.

Calls are also exercised early in hard to borrow stock, in order to get long stock, which will happen quite frequently.