The difference in these two kinds of options has nothing to do with the different continents. An American style option contract can be exercised at any time before the expiration date. If you own a call option on IBM with an expiration date of January 2010, you could exercise the option and take delivery of 100 shares of IBM at the strike price of the option at any time between now and the third Friday in January 2010. Most options traded on an exchange are traded American style.
A European style option contract can only be exercised on the expiration date. On that date, they are settled in cash. Of course you will still be able to freely trade the option in the market place - you just can't exercise it. The most popular European style options traded on American exchanges are index options such as OEX or SPX. Most European style options expire on the Thursday before the Friday expiration date of American style options.
Where you have a choice between the two styles it is best to choose the style where there is more liquidity and volume in the options, as you will invariable get better prices when you buy or sell.
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How quickly things change from one week to the next. Last week the S&P lost approximately 5% and this week the major market benchmark experienced its best week of the year as is tacked on 5.4% during the holiday shortened week.
The market entered the week with one of the most short-term oversold readings in years. The probability of a bounce was high and indeed Mr. Probability came out on top. The Dow bounced 512 points, or 5.3%, to reap its best gain since the week of July 17, 2009.
"I think it's a short-term pop," said Joe Saluzzi, co-head of equity trading at Themis Trading LLC, of the week's advance. "A lot of people are playing it close to the vest at this point. You don't really know which way it's going to go."
As I mentioned in last week's report, there was also a large unclosed gap from June 29th that would certainly cause the bears much grief while in such an extreme short-term oversold state. Couple the aforementioned with strong seasonal winds blowing in the bull's direction and the probability of an advance increased that much more.
The Nasdaq's 12-day mid-year rally begins in late June and ends on July 13th. According to the Stock Trader's Almanac the average gain for the 12-day mid-year tech rally is 3.2% versus the 0.1% for July as a whole. Moreover, the Almanac states to watch for "huge market gyrations" after July 4th, "both up and down".
The Almanac goes on to mention that "in the mid-80's the market began to evolve into a tech driven market and control in summer shifted to the outlook for the second quarter earnings of technology companies". As a result, the Nasdaq's 12-day mid-year rally from the end of June through mid-July is the strongest.
So, as we all know the bounce came to fruition and now the market has entered a short-term overbought extreme. With the exception of the Russell 2000 (IWM), all of the major indices closed their gaps from 6/29. IWM could close its gap early next week, but the probability of a short-term reprieve is more likely. Once the reprieve occurs I expect to see another push to close the gap. After the gap closes the market will most likely be in a short-term neutral state and the tug-of-war between the bulls and bears will once again be at the forefront.
The economic picture still looks rather bleak. The ISM Services Index for June declined to 53.8, which came in slightly lower than May's 55.4 reading. However, the new unemployment claims fell slightly from 460,000 to 454,000. While encouraging, economists state that the U.S. economy cannot begin meaningful new job creation until the number of new weekly jobless claims moves into the low 400,000 and sustains that level. Unfortunately, the weekly jobless report has refused to move past the mid-400,000s.
As I stated a few weeks ago, the national unemployment rate in June was 9.5%. The number is down from 9.7% in May, but mostly because so many people left the labor force, not because hiring picked up.
Earnings season begins next week with aluminum producer Alcoa on Monday. Other companies scheduled to release earnings next week include JPMorgan Chase, GE and tech giant Intel.
"I want to be a little careful here," said Mike Ryan, New York-based head of wealth management research for the Americas at UBS Financial Services Inc., which oversees about $663 billion. "From these oversold levels, obviously when you get confirmation that the economy is not rolling over, you tend to react positively. However, the rate of expansion has moderated. Jobless claims came in better, but private payroll growth remains fairly weak. As for retailers, we've already seen evidence of some good numbers which are not necessarily translated into strong retail growth."
Next week should be interesting. As I stated before, with the S&P closing the week at strong overhead resistance and currently in a short-term overbought state I expect to see a short-term reprieve as we head into the early part of next week. As we all know only time will tell.
Andy
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