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American and European Options Styles

American-style options can be exercised at any time between the purchase date and the expiration date. Of this type, are most U.S. options. The European-style option can only be exercised on the date of expiration. American-style option provides an investor with a greater degree of flexibility than a European-style option.

Black � Scholes or Black model formula, is typically used to value European options. What has become standard in the financial community is this simple equation with a closed-form solution. For American options, there are no general formulas, except for a choice of models to approximate the prices which are available (for example Whaley, binomial options model, and others � there is no consensus on which is preferable). The premium for an American-style option is at least equal to or higher than the premium for a European- style option which otherwise has the same features.

Options which are rarely exercised early, are American options. Unexercised options are worth more, because any option which has a non-negative time value is worth more. Owners, who wish to receive the full value of the option, will prefer to sell it later on, rather than exercise it immediately, sacrificing the time value.

Because the American option will be worth at least as much as the European (which it entails), the American and the European options are otherwise identical (having the same strike price, etc).

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