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American Option

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There are several different types of options, but the American option is the most heavily traded on most of the world's option exchanges. The next most traded option is the European option. The key difference between an American option and a European option is that the American option can be exercised at any time before its expiration date. The European option can only be exercised on its expiration date.

An American option is more valuable because of the freedom in terms of when the investor can choose to exercise the contract. For example, an investor may choose to buy the December 30 calls on XYZ Inc. in May when the stock is trading at $20. The stock then moves to $30 in August, bringing those December 30 calls into the money. Using an American option, the investor can sell his calls at a profit. A European option cannot be exercised before December, putting the investor at risk of losing his profits. Under this scenario, there is no such risk with an American option.

The term American option has nothing to do with location or region. The American option is traded primarily on exchanges as opposed to over the counter.



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