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. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  2. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  3. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  4. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  5. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
  6. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
Trading Center