What Distinguishes a European Option from an American Option?

The key distinction lies in the exercise timing. A European option can only be exercised on its specified expiration date.

An American option, in contrast, grants the holder the right to exercise the contract at any time up to and including the expiration date. This timing difference affects their valuation, as the early exercise feature makes American options generally more valuable and complex to price.

European options are often used for index options.