Definition
The term American option refers to an agreement that can be exercised at any time prior to, and including, its expiration date. Call or put options involving equities or common stock are typically American-style options.
Explanation
Also known as an American-style option, an American option is a contract that can be exercised at any time before its expiration date. Options traded on futures exchanges, as well as options involving equities and stock, are typically American-style. Options on commodities may be American or European.
Generally, monthly American options expire on the third Saturday of the month and are closed for trading on the preceding Friday. The exception to this rule occurs if the first day of the month falls on a Saturday. If so, then the expiration date will be the third Friday of the month.
Since American options allow their holders to exercise their rights any time prior to its expiration date, they are considered more "valuable" than European options, which do not offer this feature. The two most common American-style options include:
American Call Option: provides the holder with the right, but not the obligation, to purchase the underlying asset at the strike price any time before the contract's expiration date.
American Put Option: provides the holder with the right, but not the obligation, to sell the underlying asset at the strike price any time before the contract's expiration date.
Related Terms
The term hedge refers to a strategy that establishes a new position in an asset to protect the profitability of an existing position. While a hedge can be used to control risk, and lower a potential loss, that same hedge will also reduce potential gains.
Moneyzine EditorJanuary 19th, 2024
The term hedge ratio refers to a mathematical formula that compares the value of a hedge to the value of the position in an asset. Calculating and tracking hedge ratios allows investors to understand and control their exposure to the price volatility of various assets.Moneyzine EditorSeptember 20th, 2023
The term gamma refers to the rate of change in delta for a one point change in the price of an underlying asset. An option's gamma is typically expressed in terms of a percentage change in delta for a one-point change in the underlying asset's price.Moneyzine EditorJanuary 19th, 2024
The term fungibility refers to the interchangeability of assets due to standardization. Trading and exchange of an asset is simplified if it possesses the characteristic of fungibility.Moneyzine EditorJanuary 18th, 2024
The term expiration Friday refers to the last business day an option can be sold, purchased, or exercised before it expires. Expiration Friday occurs each quarter, and is characterized by higher than normal price volatility and trading volumes.Moneyzine EditorJanuary 17th, 2024
The term expiration date refers to the final day the holder of an option contract can exercise their right under the agreement. After the expiration date, the seller of an option can no longer be assigned.Moneyzine EditorJanuary 17th, 2024
The term exercise by exception refers to the automatic exercise of in-the-money options at expiration. The Options Clearing Corporation (OCC) institutes exercise by exception unless explicit instructions prohibit exercising the option.Moneyzine EditorJanuary 17th, 2024
The term European option refers to an agreement that can be exercised only on a specific day prior to its expiration date. Call or put options involving stock market indexes are typically European-style options.Moneyzine EditorJanuary 17th, 2024
