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.

RELATED TERMS
  1. Call On A Call

    A type of compound option in which the investor has the right ...
  2. Early Exercise

    The exercise of an option prior to its expiration date. Early ...
  3. Call Over

    When the buyer of a call option exercises the option. In options ...
  4. European Option

    An option that can only be exercised at the end of its life, ...
  5. Exercise Price

    The price at which the underlying security can be purchased (call ...
  6. Exercise

    To put into effect the right specified in a contract. In options ...
Related Articles
  1. Trading

    Three Ways to Profit Using Put Options

    A brief overview of how to profit from using put options in your portfolio.
  2. Trading

    4 Reasons To Hold Onto An Option

    There are times when an investor shouldn't exercise an option. Find out when to hold and when to fold.
  3. Trading

    Dividends, Interest Rates And Their Effect On Stock Options

    Learn how analyzing these variables are crucial to knowing when to exercise early.
  4. Trading

    Three Ways to Profit Using Call Options

    A brief overview of how to provide from using call options in your portfolio.
  5. Trading

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
  6. Trading

    Exploring The World Of Exotic Options

    Exotic options provide investors with new alternatives to manage their portfolio risks and speculate on various market opportunities. The pricing for such instruments is considerably complex, ...
  7. Trading

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  8. Trading

    American Vs. European Options

    These two options have many similar characteristics, but it's the differences that are important.
RELATED FAQS
  1. How do I change my strike price once the trade has been placed already?

    Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >>
  2. After exercising a put option, can I still hold my option contract in order to sell ...

    Once a put option contract has been exercised, that contract does not exist anymore. A put option grants you the right to ... Read Answer >>
  3. When holding an option through expiration date, are you automatically paid any profits, ...

    Holding an option through the expiration date without selling does not automatically guarantee you profits, but it might ... Read Answer >>
  4. 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 Answer >>
  5. How is a put option exercised?

    A put option is a contract that gives the option holder the right, but not obligation, to sell a set amount of shares (1 ... Read Answer >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center