I’ve read a few option books.
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Tuesday, April 10, 2007

American vs European Style Options

There are 2 styles of stock option: American Style Options and European Style Options.
The difference between American and European style options relates to when the options can be exercised:

  • American Style Options can be exercised at any time before or on the expiration date. Most of exchange-traded options are this style. Currently, all stock options in the US market are American style.
  • European Style Options can be exercised only at the expiration date.

Note:

  • American or European styles do not imply where the stock options are being traded. It does not mean that stock options traded in the US exchanges are American style and those traded in European exchanges are European style. Most stock options traded in European exchanges are American style options too.
  • Since American options provide more flexibility than European options, the price of American option will at least be equal to or higher than European option.
  • To option traders, the difference between the two styles is not very important because option traders rarely intend to exercise their options. Option traders typically just want to trade options for a profit with a much lesser capital with no intention to take possession of the underlying stock. Nevertheless, option sellers might need to be more cautious with American style options due to the possibility of early assignment.

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