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This is a level 1 question.
How or where do you find out whether your option contract is an "American style" or a "European style"? Your web page is great—keep up the good work! Thanks.
There are a couple of ways to find out if your option contract is American or European style. The first and easiest way is to ask us and we will tell you that all equity options in the U.S. are American style. The popular S&P 100 (OEX) options are also American style. However, some index options, such as the S&P 500 Index (SPX), are European in style.
If you want verification, aim your web browser to the CBOE web site at http://www.cboe.com/products/ and then scroll to the particular option that you want to verify.
What is the difference between American and European style options? Owners of American-style options can exercise their rights at any time prior to expiration date. From the minute they purchase their options until the very last second before the options expire, the holders can exercise their options. Exercising an equity call option permits the option holder the right to purchase the underlying stock at a price equal to the strike price times the number of option contracts held times 100 (the usual number of shares per options contract). Conversely, exercising an equity put option permits the option holder the right to sell the underlying stock at a price equal to the strike price times the number of option contracts held times 100 (the usual number of shares per options contract).
Sellers of call options when assigned on an exercised option will have their option position replaced by an equivalent short stock position, which is equivalent to selling the underlying stock. Conversely, sellers of put options when assigned on an exercised option will have their option position replaced by an equivalent long stock position.
Let's look at an example. You exercise 10 call contracts on an option with an 80 strike. The cost of acquiring the stock from exercising the option would be determined as follows: $80 strike price * 10 contracts * 100 shares per typical option contract) = $80,000 in total proceeds you would have to pay to acquire the stock. Note that this doesn't include the option premium put up in the first place to acquire the call option. All exchange-listed stock options are American-style.
European-style options can only be exercised on the option's expiration date. This is the last day of its life. When exercising an option, European-style option holders go through the same process and calculations as the American-style option holder. The S&P 500 Index (SPX) option is an example of a European-style option. However the S&P 100 Index (OEX) option is an example of an American-style option. These differences in exercise styles can create price differences, as well as certain risks to option writers that they should be aware of and understand. However, most of these differences and risks are small.
We hope this helps answer your question on the difference between American and European option styles. Good luck with your trading.
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Question Level Key
Level One--Basic Jargon, Definitions, Basic Mechanics of Trading.
Level Two--Introductory Points, Practical Points and Simple Strategies
Level Three--More Advanced Strategies and Repairs
Level Four--Risk Management, Psychology, and How Best to Evaluate Things.
Level Five--High end questions concerning Portfolio Analysis, Managing a Portfolio
of Options, Option Pricing Models, and Nuances of Trading. Included could be a variety of
other topics.
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