American-style and European-style options

Options fall into two categories based on when the holder is allowed to exercise them. An American-style option can be exercised at any point between purchase and expiration, giving the holder full flexibility over timing. A European-style option can only be exercised on the expiration date itself, no matter how deep the option moves into profitable territory before then.

Most equity options traded in the United States are American-style, which is why a trader holding a call that has moved sharply in the money can choose to exercise it early rather than wait for expiration, though early exercise is fairly uncommon in practice since selling the option outright usually captures more value than exercising it. Many index options, including those on broad benchmarks, are European-style instead, and are typically cash settled rather than requiring delivery of the underlying basket of stocks.

The distinction matters for pricing as well as strategy. The added flexibility of an American-style option gives it a value that is equal to or greater than an otherwise identical European-style option, since the right to exercise early is never a disadvantage and is sometimes valuable, for example around a dividend payment on the underlying stock. Traders comparing options on similar underlying assets should always check which style applies before assuming a strategy that relies on early exercise, such as an early assignment on a short call, will work the way it does with the more familiar American-style contracts.