American Option

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.

BREAKING DOWN '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.

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