Relying on American vs European options comes with different aspects to consider in your trading strategy, but what sets them apart? Is the flexibility of American style options worth it, or does the precision of European style options suit your goals better? Discover the difference between American and European options—and when a European style option can be exercised.
Key takeaways
- American vs European options differ in when they can be exercised.
- American options can be exercised anytime before or on the expiration date, while European options can only be exercised on the expiration date.
What Is an Options Exercise?
Options exercise refers to the process of using the rights granted by an options contract. When an option is exercised, the holder either buys (for a call option) or sells (for a put option) the underlying asset at the predetermined strike price. The timing of when this can be done depends on whether the option follows the American or European style (we’ll tell you more on this below).
American vs European Options – Different Exercising Styles
When comparing American vs European options, the main difference lies in when they can be exercised. American style options offer significant flexibility—you can exercise them anytime before or on the expiration date. This makes them appealing to traders who want the option to act quickly if market conditions change.
European style options, on the other hand, are more restrictive. These options can only be exercised on the expiration date, which means traders need to carefully plan their strategies in advance. If you’ve ever wondered, “When can a European style option be exercised?”—the answer is simple but strict—only at expiration.
Here’s a quick breakdown of the key points to know on European vs American options:
| Option Type | Key Features (European vs American Options) | Examples |
| American Style Options | – Can be exercised anytime from purchase until expiration.
– Favored for flexibility in dynamic markets. |
– Common in individual stock options.
– Found in some CME Group futures offerings. |
| European Style Options | – Only exercisable on the expiration date.
– They may offer lower premiums due to limited exercise opportunities. |
– Dominant in CME Group options on futures.
– Exceptions include quarterly S&P 500 options. |
European style options are more common in index options, while American style dominates stock options (just as those you may find on our options screener).
Differences Between American and European Options
As we told you, the main difference between American vs European options lies in how and when they can be exercised. American style options allow you to exercise at any time before or on the expiration date, offering greater flexibility. Conversely, European style options can only be exercised on the expiration date, requiring more strategic planning by traders.
But there is more: settlement prices also differ significantly. For American-style stock options, the settlement price is based on the closing price of the underlying asset on the expiration date, which is typically the third Friday of the expiration month. However, for certain index options that are American-style, the settlement may follow different rules.
European style options, however, use the opening prices of the index stocks on the expiration Friday morning, which can lead to discrepancies due to staggered stock openings.
European-style options may pose higher risks due to unpredictable settlement prices and limited flexibility (of course, your investment risk does not depend solely on this factor). Traders with low-value European options nearing expiration may hope for market swings on Friday morning but should weigh the risk of the option expiring worthless. Understanding these nuances ensures more informed decisions when handling American vs European options.
