The spread that forms when an investor/trader holds position in a European option and a corresponding American option. This options trading strategy involves taking positions in both a European option and American option (the two legs of the spread), for the purpose of taking both sides of a position. An American option is an option that can be exercised at any time over its life, while a European option is one that can only be exercised at its expiration date. The European option is less flexible than its American counterpart, and hence it is typically deemed less valuable. The Atlantic spread can be constructed as follows:
Long (short) an American option + Short (long) a European option
Where: strike prices, maturities, and underlyings are identical.
The Atlantic spread’ is named after the Atlantic Ocean- the body of water that lies between the United States and Europe. However, the designations “American option” and “European option” don’t relate to the countries/continents whose names they hold.
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