An American option can be exercised on any business day within the life of an option including the expiration date. European option can be exercised only at the expiration date. The key difference between American and European options relates to when the options can be exercised:

  • A European option may be exercised only at the expiration date of the option, i.e. at a single pre-defined point in time.
  • An American option on the other hand may be exercised at any time before the expiration date.

Options contracts traded on future exchanges are mainly American-style, whereas those trade over the counter are mainly European.

Nearly all stock and equity options are American options, while indexes are generally represented by European options. Commodity options can be either style.

Traditional monthly American options expire the third Saturday of every month. They are closed for trading the Friday prior. *Expire the third Friday if the first of the month begins on a Saturday.

European options expire the Friday prior to the third Saturday of every month. Therefore they are closed for trading the Thursday prior to the third Saturday of every month.

An investor holding an American-style option and seeking optimal value will only exercise it before maturity under certain circumstances. Owners who wish to realise the full value of their option will mostly prefer to sell it on, rather than exercise it immediately, sacrificing the time value.

European options are typically valued using the Black–Scholes or Black model formula.This is a relatively simple Partial Differential Equation equation with a closed-form solution that has become standard in the financial community. There are no general formulae for American options, but a choice of models to approximate the price is available

Where an American and a European option are otherwise identical (having the same strike price etc.), the American option will be worth at least as much as the European (which it entails). If it is worth more, then the difference is a guide to the likelihood of early exercise. In practice, one can calculate the Black–Scholes price of a European option that is equivalent to the American option (except for the exercise dates of course). The difference between the two prices can then be used to calibrate the more complex American option model.

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