American vs. European Options

Posted on 2023-04-25

American and European options are two types of options contracts that differ in terms of when the option holder can exercise their right to buy or sell the underlying asset.

An American option can be exercised at any time before the expiration date, while a European option can only be exercised on the expiration date.

For example, if an investor owns an American call option on stock XYZ with a strike price of $50 and the current market price is $60, they can exercise their option and buy the stock for $50 at any point before the option's expiration date. With a European option, the holder can only exercise the option on the expiration date.

The ability to exercise an American option at any time prior to expiration gives it more flexibility, and therefore, American options generally have higher premiums compared to European options. However, this additional flexibility also means that American options can be more complex and risky to trade.

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