An American option contract which gives the holder the right, but not the obligation, to sell an underlying asset at an agreed-upon price on or before the expiration date of the contract, regardless of the prevailing market price of that asset at the time of expiration or exercise. For example, an American put option with an exercise price of USD 45 will be exercised on or prior to expiration date if the sum of the market price of its underlying share and the premium is less than the exercise price (strike price). Suppose the prevailing market price is USD 38 at a given time before expiration, whilst the option premium paid by the holder was USD 5, then the option should be exercised for the holder to make a profit of 45- 38-5= USD 2 per share. For a contract comprising 100 shares, that produces a total payoff of USD 200.
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