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.
Glossar
European Option
Valuation ⎊ A European option, within cryptocurrency derivatives, represents a contract granting the holder the right, but not the obligation, to buy or sell an underlying crypto asset at a predetermined price on a specific date.
Early Exercise Feature
Exercise ⎊ The early exercise feature, prevalent in cryptocurrency options and financial derivatives, allows holders to forfeit their right to defer settlement before the contractual expiration date.