What Is the Primary Difference between a European and American Option?

The primary difference lies in when the option holder is permitted to exercise the contract. A European option can only be exercised on its expiration date.

An American option grants the holder the right to exercise the contract at any time between the purchase date and the expiration date. This early exercise feature typically makes the American option more valuable than its European counterpart, all else being equal.

This difference is crucial for pricing models.