Warrior Trading Blog

American Option Definition: Day Trading Terminology

American Option

An American option is an options contract that can be exercised on or before the expiry or maturity date. American options are contrasted with European options that can only be exercised on their expiry or maturity date.

American Options in Trading

Despite the name, the use of American options in trading is not a matter of geographic location. American options are the standard form for options contracts around the world. The most common exception is in the case of options for indices, such as the VIX, which tend to use European options.

American options are the most common form of option used in the case of equities, which are a large portion of the derivatives market.

American options allow the buyer to hedge across a range of dates, as opposed to hedging for the date of expiration only, which makes them useful in the development of advanced trading strategies for equities.

The flexible exercise date of American options also makes them useful investing instruments in their own right, much more so than their European counterparts. Many investors develop complex trading strategies using a combination of American options, which allow them to create positions that could not be achieved using European options.

In situations where both American options and European options are used, the American options tend to trade at a premium as a result of their more favorable exercise range.

Final Thoughts

American options are the standard form of option used in most derivatives markets, particularly the large market for equity options.

The flexible exercise date of American options means that they are far more useful in the development of advanced trading strategies than European options.

American options allow users to create complex positions in the equity market, or complex positions that involve only options.