Comparing American- and European-Style Options - dummies

Comparing American- and European-Style Options

There are two major categories of options: American-style and European-style. Which type you choose depends on the way you want to exercise them, and each has advantages you should know about to make wise investing decisions.

  • American-style options can be exercised, or acted upon, if your intent is to do what the option gives you the right to do on or before the expiration date. The person holding the option decides.

    The advantage of American-style options is that you have more flexibility regarding when and how to exercise them. Most individual stock options and some index options are traded under American-style options exercise rules.

  • European-style options can be exercised only on the date of expiration. European-style options are traded on many of the cash-based indexes. For example, options based on the S&P 500 and the Dow Jones Industrial indexes are European-style.

    The advantage of European-style options is that you are certain about the timeline you have until the option is exercised.

All options can be exercised only once.