American Option

AAA

DEFINITION of 'American Option'

An option that can be exercised anytime during its life. American options allow option holders to exercise the option at any time prior to and including its maturity date, thus increasing the value of the option to the holder relative to European options, which can only be exercised at maturity. The majority of exchange-traded options are American.

INVESTOPEDIA EXPLAINS 'American Option'

Since investors have the freedom to exercise their American options at any point during the life of the contract, they are more valuable than European options, which can only be exercised at maturity. Consider this example: If you bought a Ford March Call option in March 2005, expiring in March of 2006, you would have the right to exercise the call option at anytime up until its expiration date. Had the Ford option been a European option, you could only exercise the option at the expiry date, in March 2006. During the year, the share price could have been most optimal for exercise in December of 2005, but you would have to wait to exercise your option until March 2006, where it could be out-of-the-money and virtually worthless.

Note that the name of this option style has nothing to do with the geographic location.

RELATED TERMS
  1. Put

    An option contract giving the owner the right, but not the obligation, ...
  2. Derivative

    A security whose price is dependent upon or derived from one ...
  3. Real Option

    An alternative or choice that becomes available with a business ...
  4. Range Accrual

    A form of interest accrual in which the coupon rate is only earned ...
  5. Fiduciary Call

    A cost effective strategy designed to limit the costs associated ...
  6. Call

    1. The period of time between the opening and closing of some ...
Related Articles
  1. American Vs. European Options
    Options & Futures

    American Vs. European Options

  2. Getting Acquainted With Options Trading
    Options & Futures

    Getting Acquainted With Options Trading

  3. Stock Options: What's Price Got To Do ...
    Options & Futures

    Stock Options: What's Price Got To Do ...

  4. How do you tell whether an option is ...
    Options & Futures

    How do you tell whether an option is ...

comments powered by Disqus
Hot Definitions
  1. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
  2. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  3. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  4. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  5. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  6. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
Trading Center