American and European Options
The key difference between American and European options relates to when the options can be exercised:
- A European option may be exercised only at the expiration date of the option, i.e. at a single pre-defined point in time.
- An American option on the other hand may be exercised at any time before the expiration date.
For both, the payoff—when it occurs—is via:
- Max, for a call option
- Max, for a put option:
(Where K is the Strike price and S is the spot price of the underlying asset)
Option contracts traded on futures exchanges are mainly American-style, whereas those traded over-the-counter are mainly European.
Nearly all stock and equity options are American options, while indexes are generally represented by European options. Commodity options can be either style. A list of European and American options can be found on the Options Industry Council website.
Read more about this topic: Option Style
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