In the options market, options are categorized into two types, American Style Options as well as European Style Options, through the ability to exercise an option early, which are not regional options, but rather a terminology used to describe the exercise of both types of options. They differ significantly in terms of the timing of Exercise an option, which directly affects the value of the option and the trading strategy. The following section describes these two types of options in a number of ways.
Exercise time
American Style Options: Exercise an option at any time prior to the expiration date for greater flexibility.
European Style Options: Can only be exercised on the expiration date, less flexible.
Option Values
European Style Options: Compared to American Style Options, the value of European Style Options is lower because American Style Options are more flexible than European Style Options due to their ability to Exercise an option early.
American Style Options: Slightly higher value compared to European Style Options.
The Complexity of Options Pricing
American Style Options: Pricing and analyzing American Style Options is more complex than European Style Options because of the possibility of early Exercise an option.
European Style Options: Pricing and analysis is relatively simple. A common option pricing model, the Black-Scholes model, is the European Style Options pricing model.
Scope of application
European Style Options: European style options are commonly used for options on individual stocks, commodities and other underlying assets.
American Style Options: American Style Options are commonly used for options on foreign exchange, stock indexes and other underlying assets.
In trading, the choice of options depends on the trader's risk appetite as well as trading needs. Investors with a high risk appetite and the pursuit of flexibility can choose American Style Options. Investors with a low risk appetite and the pursuit of certainty can choose European Style Options.
