American and European
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).
For Instant Access,
Sign up Now!
Just one winning trade
could pay for your membership for years to come!