There are basically two different types of options that affect when an option can be exercised. In this article, you will find out what a European option is, what alternatives there are and how you can recognize the type of option.
Exercise of a European option
Holders of a European option can sell (put) or buy (call) an underlying asset at a predetermined price, also known as the strike, on the expiry date. With this variant there are No possibility to exercise the option in advance.
European option vs. American option
American options have the advantage that they give the owner the right, at any time during the term exercise the option. This goes hand in hand with special advantages, such as greater flexibility and taking advantage of opportunities to maximize profits.
- However, owners must pay a higher price to obtain this right
- European options differ in that they do not offer this possibility
- Accordingly, the names do not provide any information about where the options are traded; they are different types of execution
How do I recognize European options?
Investors themselves cannot choose whether they want to trade their option in European or American style. The determination is made by the Type of underlying and the corresponding Futures exchange.
- In general, options on ETFs and equities tend to be traded in the US, while options on commodities and indices tend to be traded in Europe
- You can find out exactly what type of option is available on the respective trading platform
The prices for American options are usually somewhat more expensive due to the additional option for early exercise. more expensive. Owners pay for the Greater flexibility and the resulting opportunities.
European call option example
Once the term has expired, the buyer of the option can decide whether or not to exercise it. The Exercise only makes sense, when profits are made can. In the case of a call option, the underlying asset could be bought at the strike price, while a put option could be sold.
If the option is exercised, the Vendor the option the Either deliver or receive the underlying asset. Through the Option premiumhe received, he was compensated for this duty.
Conclusion: European option simply explained
With a European option, traders can change the underlying buy or sell at the end of the term. You cannot decide to exercise the option beforehand at another time.
American options work differently and offer the possibility of exercising the option at any time during the term. This right is normally subject to a Premium an.
Mostly American-style options on shares and ETFs traded, while European-style options on commodities or indices can be traded. If you want to know what type of option you have, you can look it up on your trading platform.