Option Investor
Educational Article

American Style Options versus European style options

HAVING TROUBLE PRINTING?
Printer friendly version

Just when you think you have a handle on the little quirks of the option market, you seem to always run into a juicy little tidbit of information to enhance your further understanding of these unique and diverse trading vehicles. So without further delay, let me introduce you to the two styles of options that are currently traded on the major option exchanges today.
They are the American-style option and the European-style option. Let's take a quick examination of both and see how each one differs.

American- style option

An option that can be exercised anytime during its lifetime. The majority of exchange-traded options are American Style Options. The option trader has the choice when to exercise this type of option. The may chose to exercise an American option at any point during the life of the contract. The American style option, in almost all cases is generally more valuable than European options. contract.

For example: If you bought a XYZ September 60 Call, you would have the right to exercise the call option anytime up until the final date of its expiration. (See figure 1-1 below)

FIGURE 1-1: AMERICAN STYLE OPTION CAN BE EXERCISED AT ANYTIME BEFORE THE EXPIRATION DATE.

Do you know how to trade the Iron Condor?

Its just one of the safe, effective, and stress free option trading strategy that helped my Couch Potato Trader subscribers who participated with us-rack up impressive profits of $115,665 (less commissions) in 28 out of 29 months. Remarkably enough, 99% of all traders are clueless about it. and that's why they always-lose-money. to us. Don't want to become THAT statistic?

Click Here:

http://www.optioninvestor.com/newsletters/cpt.aspx?aid=58

European-style option
 
This contract has one subtle large difference. This is an option contract that can only be exercised on the expiration date. Unlike the American style option which can be exercised anytime before the expiration.
If the XYZ option had been a European option, you could have only exercised the option at the expiration date of the contract. So in the case above that would have been on the third Saturday after the third Friday in September.
CAVEAT: Notice that because you can only exercise the European option at the end of the expiration period, you could have missed an opportunity to exercise the stock when it was at a higher price than at the expiration period. In addition, the stock might even be trading at a price less then the strike price and the option might be worthless to exercise at expiration. (See Figure 2-2 below)

FIGURE 2-2: EUROPEAN STYLE OPTION CAN ONLY BE EXERCISED ON EXPIRATION DATE

Note: Even though the options are called American and European, these option styles have nothing to do with their geographical location or the location of their trading markets
 

Options 101 Archives