American options vs. European Options

Option trading is dependent on more factors and variables than stock trading hence traders have to acquaint themselves with all these factors. Although they are aware of the call and put options they are not familiar with the option styles available. There are basically two options styles, that is, the American option and the European options.

Most investors are generally acquainted with the American options where the trading can be exercised any time before the expiration date. Trading on stocks like General Electric, Apple and Google are examples of American style options.

European style options are less common than their American counterparts and are hence less familiar to traders. Trading options on stock indices like the NASDAQ, the S & P 500 and on currency pairs like the U.S. Dollar vs. the Euro is trading the European style options. Here the trading can be exercised only at the expiration and not before.

However both the option styles have the following common characteristics:

  • Have a strike price
  • They are traded on exchanges
  • Have a set expiration date
  • Use similar structures for ticker symbols

Thus although both the options have some common characteristics, the significant difference between the two is the time when either of them can be exercised. This difference basically results in the price of the option. The European style being fixed to be exercised at expiration is assuming less risk and therefore the trader charges a lower premium. On the other hand, the American style option trader can exercise trading any time before the expiration thus assuming greater risk and hence charges a higher risk premium and raising the price of the option.