American and European Styles

There are two styles of options, called American and European, though that doesn’t depend where they were bought. Usually options on stock are American-style, and options on indices are European, and it is important that you know which are the basis of your trade.

The difference between them is when they can be exercised. The European option can only be exercised on the expiration date, and the American option can be exercised at any time up to the expiration date. At first sight, you would think that the American option, as it is more flexible, and includes the ability to cash in at the expiration date like a European option, would be much preferable. As we’ll see in the strategies, exercising early is usually a mistake, so you don’t get such a big advantage as you might think with the American-style. However, not all option traders choose to use such strategies, so you may find differing opinions on which is “best”.

When you choose to spread bet on the price of options, you are simply placing a bet with your bookmaker, and as such the timing depends on how the spread betting company sees the price changes.