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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  1. What do all of the letters in a stock option ticker symbol mean?

    The option ticker explains four main things about the option: the underlying stock, whether it is a call or a put option, ... Read Full Answer >>
  2. How do you tell whether an option is American or European style?

    As a quick recap, American-style options are options that can be exercised at the strike price anytime before or on the date ... Read Full Answer >>
  3. Can an option be exercised on the expiration date?

    The use of options has increased dramatically over the years as a way to profit from or hedge against the volatile movements ... Read Full Answer >>
  4. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  5. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  6. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>

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