Given that an American option can be exercised at any time, how does one handle algorithmically shorting an American option in a back test? I am not sure what the best practice is to simulate the early exercise for selling American Options in a backtest.
There are two approaches I can think of:
- Assume that the option gets exercised if it crosses an arbitrary percent in the money.
- Treat the option the same way you would handle a European option.