European Option

The name refers to the exercise style, not where the option is traded. European options are traded all over the world.

With a European option, the holder must wait until the expiry date to exercise. However, they can usually sell the option to someone else before then, so they are not completely locked in.

For example, a European call option on a stock index with a strike of 5,000 and an expiry in June can only be exercised in June. If the index rises to 5,400 in March but falls back to 5,100 by June, the holder can exercise only at 5,100, gaining 100 per unit, not the 400 available in March. They could, however, have sold the option in March to capture its higher value.

Many index options and many options traded over the counter are European style. Because they offer less flexibility than American options, European options are sometimes slightly cheaper, all else equal. They are also simpler to value mathematically, which is why the best-known option pricing model, the Black–Scholes model, was originally designed for them.