Options University Courses

An option that has a choice to be exercised at any point in the life time is called an American option. Generally, exchange traded options fall in the category of American options only.

American options are more valued by investors as there is a higher flexibility due to exercise option available throughout life time. The European option has a limitation of exercise only on maturity.

How Does American Option Applied in Options Market?
An example to explain this; If a March call option of company XYZ having expiry in March’08 is bought in March’05, there is a right of exercising the option t purchase anytime up to the date of expiration. Now, in case of a European option, the option to exercise is available only on expiry dare i.e. in March’08. This is problematic as some profitable opportunity may be lost somewhere between March’07 and March’08. Moreover, if the option is out of the money at the expiration date, it becomes worthless.

An important point to note is that the nomenclature is totally unrelated to the location/country.