In this training lesson we'll cover the major differences between American and European Style Options. Pay attention close to this video because most traders get confused as to what they can or can't do with each style. Remember that we are specifically talking about the ability to exercise an option contract. Trading either style does not effect your ability to close or trade options prior to expiration should you need to get out of a position.
Only indexes, etc are European style. And specifically, this relates just to how they are exercised and your ability to exercise them as you go through the market. With American style options, you can exercise these any time you want before expiration. If you own a call option and there's 15 days to expiration, you can still exercise that option and buy the stock at the strike price.
This is different than if you wanted to actually just get rid of your position and sell it back to the market. You could still make a profit that way. But if you want to exercise the option, you want to actually own the underlying shares of stock, then this is what you would do with an American style option. Again, you can do this any time before expiration and up to expiration. Now, this is different than European style options.
With European style, you can only exercise options at expiration. You would have to wait until the actual expiration date. You can easily sell this contract back to the market and get whatever value is left in it and still create a profit. As always, with this ability, you have more value. As with anything, the more options you have, the more valuable it is. Now, because an owner of an American style option has the right to exercise it at any time before it expires, they have more flexibility which gives the contract more value all other things being equal.
Think about it this way. If you wanted to buy that stock right now with an American style option, you could go out to the market and buy that stock. But if you wanted to own the stock, then you would have to wait with a European style option.
Overall, European style options are going to be just a little bit cheaper than the traditional American style. As always, on Option Alpha for our members, we have a great option expiration calendar that we have for about four years into the future. As soon as the exchanges publish their expiration calendar, then we get those. And what's great about it is that it has these holiday days on here, it has the option stop trading days and then also has the options expiration day.
Options actually stop trading on the third Friday of every month and they actually expire that following Saturday, so you have a little time to actually make some decisions with your broker. As always, I hope you guys really enjoy this video and thanks for watching. Please use any of the social links right below this video to share it on your favorite social network with any of your friends, family or colleagues.
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