What it is:
How it works (Example):
For example, an investor holding an American option that expires on the last Friday in March has the right to exercise that option at any time on or before that date.
Since the option price moves in sync with the underlying asset, the value of the option may rise and fall multiple times over the life of the contract. Most of the options that trade on major exchanges are American options.
Why it Matters:
With an American option, the holder can wait for the most advantageous price to exercise the option. He can exercise the option on any of the trading days up to the expiration date. Due to greater flexibility, American options are more valuable than European-style options, which can only be exercised at maturity.