Explain the Difference between American and European Options

The key difference lies in the exercise date. An American option gives the holder the right to exercise the contract at any time between the purchase date and the expiration date.

A European option, in contrast, can only be exercised on the expiration date itself. Despite the names, this distinction is based on the exercise timing, not the geographic location of the exchange.

Because of the flexibility, American options typically carry a higher premium than equivalent European options.