Is the older London Call (privilege), different from European Call?
Is the older London Call (privilege), different from European Call?
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Arben Tapia · External communityPost link
External question — Quantitative Finance Stack Exchange
Author: Arben Tapia
Original post: https://quant.stackexchange.com/questions/85832
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In another discussion the user
zer0hedge
provides an excerpt from definitions of CALL from a book of 1904 from S.A.Nelson which contains the following:
...
and before its maturity if it shows you a profit, you are obliged to trade in the open market and then balance the operation on settlement day"
...
This makes it similar to American Call in one aspect, but a bit worse (the "obliged" part), whereas recent reading of definitions of European Call, do not include neither the "before", nor the "obliged" part.
If they are different (older London Call vs more recent European Call), how does their price compare to American Call? (I'd assume the "before" should increase the value, but the obliged should have a moderation effect).
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D Stanley · External communityPost link
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Author: D Stanley
Original post: https://quant.stackexchange.com/a/85836
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In that context, I believe he is saying that
if you wanted to lock in profits
, then you cannot settle the option early, but
can
make additional trades (i.e. sell an equivalent option to someone else) to lock in profits and offset your position. So "obliged to trade in the open market" means you must make offsetting trades rather than being able to settle the option early. In reality, trading to offset your position is almost always more profitable than settling early, which is why American options are very rarely exercised early and are priced very similarly to European options.
His description of a "London Privilege" is exactly equal to a European option, but the European/American terminology was not introduced until much later.
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Quoted from Forex.com.bd-Editorial External answer — Quantitative Finance Stack Exchange Author: D Stanley Source score (net votes, not local likes): 2 Original post: https://quant.stackexchange.com/a/85836 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. In that context, I believe he is saying that if you wanted to lock in profits , then you cannot settle the option early, but can make additional trades (i.e. sell an equivalent option to someone else) to lock in profits and offset your position. So "obliged to trade in the open market" means you must make offsetting trades rather than being able to settle the option early. In reality, trading to offset your position is almost always more profitable than settling early, which is why American options are very rarely exercised early and are priced very similarly to European options. His description of a "London Privilege" is exactly equal to a European option, but the European/American terminology was not introduced until much later.
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