American Option

Like European options, the name refers to the exercise style, not location. American options are traded in many countries.

The extra flexibility of early exercise means an American option is worth at least as much as an otherwise identical European option, and sometimes more.

In practice, it rarely makes sense to exercise an American call option on a share that pays no dividends before expiry, because selling the option usually gives more money than exercising it, as the option still has time value. Early exercise can make sense in some cases, such as exercising a call just before a large dividend is paid or exercising a deep in-the-money put.

For example, a holder of an American put option with a strike of 50 on a share that has fallen to 20 might exercise early to receive 50 per share immediately and invest the money, rather than waiting for expiry.

Most options on individual shares traded on exchanges are American style. Because of the early exercise feature, they are more complex to value than European options, usually requiring numerical methods.