What Is the Difference between an American and a European Option in the Context of Derivatives Trading?

The key difference lies in the exercise rights. A European option can only be exercised on its expiration date.

An American option, however, grants the holder the right to exercise the option at any time up to and including the expiration date. In practice, American options are generally more valuable because of the flexibility they offer, but this flexibility makes them more complex to price, especially in a non-standard OTC environment.