There are American and European style options. These differ in particular in an additional option that offers greater flexibility. In this article, you will find out what the differences are and what distinguishes American options.
Exercise of an American option
American options are characterized by the fact that they can be exercised at any time during the term. This gives investors greater flexibility and allows them to actively influence pricing.
Holders of such options therefore have the right to sell (put) or buy (call) the underlying asset at the strike, the specified time. If the price develops accordingly, traders can profit and take advantage of the time. For this right, however, they normally pay a higher price through a corresponding premium.
European option vs. American option
At European options this additional right does not exist. The buyer can Exercise of the option not before the end of the term to take advantage of it. Instead, they must wait until the term has expired.
If the price of a share is far below the average price, he cannot exercise the option. He must wait until the end is reached before he can exercise the option.
American call option and put option
Mit einer Call option of an American-style user, the holder has the right to buy the underlying asset of the option at a predetermined price. This means that he has the right to exercise this option on any day within the period. At the end, an expiration date occurs, after which the option expires and with it the right to buy the underlying asset.
The Put option American-style options allow the holder to sell the underlying asset at any time up to the expiration date. These options are used for short selling or hedging.
How do I recognize an American option?
Investors cannot choose for themselves whether they want to trade in the American or European style. This is determined by the respective Futures exchange and the Type of underlying are defined. Normally, options on shares and ETFs are regulated in the American style, while options on indices and commodities are regulated in the European style.
- You can see what type of option it is on the trading platforms
- The exercise style can often be recognized under the item "exercise style"
- It is also useful to know that the prices for the American style are usually somewhat higher
- This is due to the additional option and the resulting increased flexibility
Trading American options - early exercise in practice?
It The premature exercise of the option of an American option. This is due to the time value premium on the intrinsic value that must be paid under this condition. However, the time value is lost when the option is exercised. Only the intrinsic value is settled upon exercise.
Conclusion: American options explained clearly
An American option gives the holder the right to exercise the option at any time during its term. This goes hand in hand with a greater flexibility and Chances of winning. However, a increased price must be paid for this option.
European options differ in that owners do not have such a right. This means that they cannot be exercised prematurely. In practice, exercise before the expiry date is rather rare.
In most cases, options on Raw materials or Indexes in the European style held, while options on ETFs or Stocks rather american are held. The corresponding information can be found on the trading platforms.