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.
Related or Semi-related Video
Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
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