What is an 'American Option'
An American option is 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'American options allow the holder to buy or sell a specified underlying asset, on or before a predetermined expiration date. 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. The last day to exercise a weekly American option is normally on the Friday of the week in which the option contract expires. Conversely, the last day to exercise a monthly American option is normally the third Friday of the month. Note that the name of this option style has nothing to do with the geographic location.
American Call Option
Consider this example: If an investor purchased a call option on Apple Inc. in March, expiring in December of the current year, the investor would have the right to exercise the call option at any time up until its expiration date. If the call option on Apple Inc. had been a European option, the investor would only be able exercise the option at the expiry date in December. If, hypothetically, that share price became most optimal for exercise in August, the investor would still have to wait until December to exercise the call option, when it could be out-of-the-money and virtually worthless.
Assume the investor exercised the call option on Apple prior to the expiration date, the investor would be long 100 shares of Apple at the specified strike price. Conversely, if the investor waited until the expiration date and Apple's stock price closed at least one cent above the strike price, the investor would be automatically exercised and long 100 shares.
American Put Option
Contrary to an American call option, the holder of an American put option has the right to exercise the option at any point in time until its expiration date. Assume an investor purchased a Facebook Inc. July put option in January. The investor has the right to exercise the put option on or before the option's expiration date. If the investor decides to exercise the put option, the investor would be short 100 shares of Facebook at the predetermined strike price.