Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

European Option

What it is:

A European option is a put or call option that can be exercised only on its expiration date

How it works (Example):

Suppose an investor buys a European call option on March 1st that expires on the third Friday in March. During the second week of March, the value of the underlying asset rises above the strike price. The holder of the European option is unable to take advantage of this momentary opportunity to lock in a profit since the only date he can exercise this option is on its expiration date.

Why it Matters:

European options usually trade at a discount to their American counterparts since there is only a single opportunity to exercise the option. If the holder of the European option doesn’t want to wait until the expiration date, he must close his position by selling the option. These options trade mainly over the counter and are rarely seen on the major exchanges.