American Option

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

hedge, hedge ratio, gamma, fungibility, expiration Friday, expiration date, exercise by exception, European option