How Does the Exercise Style Affect the Option’s Time Value?
The American exercise style gives the holder the flexibility to exercise anytime, which adds value compared to the European style. This extra value is embedded in the option's premium as a higher time value (extrinsic value).
Because the European option can only be exercised at expiration, it has a lower or equal time value.
Glossar
American Exercise Style
Characteristic ⎊ The American exercise style grants the option holder the right to exercise the contract at any point between the purchase date and the expiration date.
Exercise Style
Style ⎊ This defines the procedural rule dictating when an option holder can exercise their right to buy or sell the underlying asset at the strike price.
Time Value
Component ⎊ Time value, also known as extrinsic value, is a component of an option's premium that reflects the probability of the underlying asset's price moving favorably before the option expires.