How Does the Exercise Flexibility of an American Option Affect Its Premium Compared to a European Option?
The ability to exercise an American option at any point before expiration adds value to the contract. This early exercise feature means the American option's premium will almost always be higher than an otherwise identical European option.
The extra time value accounts for the potential opportunity to capture intrinsic value early. This difference is a core concept in options pricing theory.
Glossar
Early Exercise Feature
Feature ⎊ The Early Exercise Feature is the defining characteristic of American style options, permitting the holder to execute their contractual right to buy or sell the underlying asset before the official expiration date.
Exercise Flexibility
Adaptation ⎊ The capacity for exercise flexibility within cryptocurrency derivatives, options trading, and related financial instruments signifies a strategic responsiveness to evolving market conditions and contractual stipulations.