American Options: When to Exercise Early and Why It Matters
European options are simple: you wait until expiry, check if they are in the money, and either collect the payoff or walk away. American options give you more power and more headaches. You can exercise at any time before expiry, which sounds great but raises a hard question: when exactly should you do it? Chapter 9 of Wilmott’s book tackles this problem, and the ideas that come out of it show up again and again throughout the rest of quantitative finance.