Why an ITM American Put Spread Can Trade Above Intrinsic Value

Summary

The document raises a pricing question about an in-the-money American put spread. Since American options can be exercised before expiration, the author asks whether the spread should be worth exactly its intrinsic value: exercising would realize that amount immediately, which seems to cap the spread’s value. The author notes that observed prices do not appear to match this expectation, but provides no market example or pricing analysis to explain the difference.

The issue concerns how early exercise and the value of a multi-leg position interact. The document does not specify the strikes, market conditions, or whether exercising the spread’s legs together is possible, and it gives no answer. It is therefore a prompt for investigating American spread valuation rather than a worked method or a supported conclusion.

Key ideas

• The document asks whether an in-the-money American put spread should be worth its intrinsic value.
• It reasons that early exercise could realize intrinsic value immediately.
• It reports that observed prices do not seem to match that expectation.
• It provides no example, explanation, or resolution of the pricing question.

Tags

# Price of an ITM American Put Spread


# Price of an ITM American Put Spread












Should an ITM American put spread be equal to its intrinsic value as the options could then be exercised for the intrinsic value instantly? There is not more the spread would be able to make. This isn't observed in practise though. Wondering if someone could clarify.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.