Options Basics: Types Of Options
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There are two main types of options:
- American options can be exercised at any time between the date of purchase and the expiration date. The example about Cory's Tequila Co. is an example of the use of an American option. Most exchange-traded options are of this type.
- European options are different from American options in that they can only be exercised at the end of their lives.
The distinction between American and European options has nothing to do with geographic location.
So far we've only discussed options in a short-term context. There are also options with holding times of one, two or multiple years, which may be more appealing for long-term investors.
These options are called long-term equity anticipation securities (LEAPS). By providing opportunities to control and manage risk or even to speculate, LEAPS are virtually identical to regular options. LEAPS, however, provide these opportunities for much longer periods of time. Although they are not available on all stocks, LEAPS are available on most widely held issues.
The simple calls and puts we've discussed are sometimes referred to as plain vanilla options. Even though the subject of options can be difficult to understand at first, these plain vanilla options are as easy as it gets!
Because of the versatility of options, there are many types and variations of options. Non-standard options are called exotic options, which are either variations on the payoff profiles of the plain vanilla options or are wholly different products with "option-ality" embedded in them. (To learn more, see Becoming Fluent In Options And Futures and What's the difference between a regular option and an exotic option?)
Next: Options Basics: How To Read An Options Table »
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