Derivatives - Option Styles

There are two styles of options, the difference between them being the time at which they can be exercised:

  1. American options allow the holder to exercise at any time before or at expiration.

  2. European options allow the holder to exercise only at expiration.

This important distinction, which does not necessarily refer to where the option was written, can dramatically affect an option's price. If the period in which the option can be exercised is a matter of months that is more valuable than if the period is just one day.

  • Most equity options are traded American-style and most debt and currency options, which will be covered soon, are traded European-style.

  • Regardless of the timing of the exercise or the nature of the commodity from which the option is derived, the investor is placing a bet that something is going to a) go up, b) go down or c) remain stable.

  • In Wall Street jargon, this means the investor is respectively a) bullish, b) bearish or c) neutral.

The following discussions on options strategies will keep things simple and focus on stock options without considering premiums.

Spread Option Strategies
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