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European Option

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A European option is an option that can only be exercised during a short period of time before its expiration date. A European option contrasts with an American option, in that an American option can be exercised anytime on or before expiration. This makes the European option less flexible than its American counterpart, which is why a European option is likely to have a lower premium on any given security. The trader of a European option can, however, execute a closing transaction (i.e. by taking an offsetting position of an identical option) at any time prior to the expiration date.

Most publicly traded stock options are exercisable in the American style. But in the case of index options, which are settled in cash rather than in assets, the European option is relatively more prevalent. For example, an index option on the Dow Jones Industrial Average, NASDAQ 100, or Russell 1000 is exercised as a European option. An index option on S&P 100, on the other hand, can be purchased in either the American style (OEX) or as a European option (XEO).



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