What is an American Option?

An American option is a put option or call option that can be exercised at any time on or before its expiration date.

How Does an American Option Work?

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 Does an American Option Matter?

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.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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