Just like all the freedoms we expect as being an American, an American option is a type of option in the stock market that can be bought or sold anytime during its life—up to and including the maturity date. The poor European option can only be exercised at maturity, making the American ones more valuable. (The names actually have nothing to do with their geographic location.)
Let’s say you purchased an American call option (predicting the price will go up) for Microsoft in April, which expires in November of the same year. Perhaps the share price goes up in September, making it the best time to exercise the option. If it had been a European option you would have had to wait until November, when the option might have been worthless.
Why would there be a restriction in the case of the European option? Well, there's a lot more fiat to manipulate stock prices in the European system. Like ..let's pretend the King still had bank (or the Queen) and he was short a bunch of call options coming due with a stock trading at $92 under a strike at $80. He'd be highly incentivized to get his crown-loving countrymen to dump the shares down to as close to $80 as he could to avoid being crushed by that bad trade. In the American system, it's way harder to...meddle and muddle.
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Finance: What's the Difference Between a...13 Views
Finance a la shmoop what's the difference between an American and a
European-style stock option okay if you clicked to [Man talking]
watch this video we're gonna assume you know what an option is if not well then
our video on it which won a Palme-d'Oy Vey-at con awaits alright well this [People chanting at Palme d'Oy Vey]
video is about one thing only a date not brought to you by tinder.. American
options can be converted anytime they are owned until they expire which in the
US usually happens on the third Friday of each month
aka expiration Friday that is the November 50 strike calls expire at the [Calendar flicks]
end of the trading day on the third Friday of this coming November it's just
easier having them all expire on the same day saves a lot of you know date
writing and yeah we thought the same thing thank goodness they don't sell [Green eggs on a shelf]
eggs that way ok so that's an American style option - A European style option is
different in one key way other than you know all the socialism and centuries of
espresso and wine and tea development behind it [People pouring tea, wine and espresso]
European options can only be converted and expire on one day so if that day
comes along in well North Korea decides to get all balmy or nuki and the market
goes down a lot well then you're out of luck at least if you had call options [Stock market dropping]
who were hoping to make money from because the market would go down right
well the fact that it's only one day when you can sell is in large part a
reflection of the very low tech manual labor systems in place when the whole [Person scribbling on piece of paper]
call option world was put into place in Britain like a hundred years ago the
American system was run largely by computers from a very early time in its [Person using computer]
history ie it was much later than when the Brits started and you can imagine
that if you leave open the potential for trading options at any time during a [Trade transferring between people]
given period well it leaves massively more data entry and data management
duties then if all the fireworks happen on one day so you really do need [Fireworks going off in the sky as window is open]
computers to manage all that stuff and it of course leaves the market open to a
whole lot more corruption manipulation and control from the
you know powers-that-be so do they sell options on being Queen,
King, Joker yeah when and how would they expire...[Man throws away King and Joker cards]
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