American Option

American Option
An option that can be exercised anytime during its life. The majority of exchange-traded options are American.

Since investors have the freedom to exercise their American options at any point during the life of the contract, they are more valuable than European options which can only be exercised at maturity.

Consider this example: If you bought a Ford March Call option expiring in March of 2006 in March 2005, you would have the right to exercise the call option at anytime up until its expiration date. Had the Ford option been a European option, you could only exercise the option at the expiry date in March '06. During the year, the share price could have been most optimal for exercise in December of 2005, but you would have to wait to exercise your option until March 2006, where it could be out-of-the-money and virtually worthless.

Note that the name of this option style has nothing to do with the geographic location.

Investment dictionary. . 2012.

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