European Style Options
A European option is different from an American style
option in that it can only be exercised at the end of the trade. It may not be sold before the expiration
date, which could lead to better trades. The European option does not hold an advantage or disadvantage over
other styles of options, but are simply an alternative form of trading.
If you own a European style option and want to remove it from your portfolio, the option must be sold.
The drawback is the inability to exit the trade if the highest profit comes prior to expiration date. This
is quite different than at American option, which can be sold at any time to capture the most profit. But
the European style option is certainly simpler to understand, especially for the newcomer to better trades.
European options are all cash settled. Depending on the strategies you use, it's typically more convenient
when options settle in cash.
American options settle at the closing price on the third Friday of the month. The European options are
determined by the price of each component of the index when it opens for trading on the morning of the third
Friday. Since you never know where the market will open, options that seemed ready to expire worthless can
suddenly become worth hundreds or thousands of dollars. Because of the risk involved, many observers believe
it's better to cover any short positions before the market closes on Thursday before expiration.
European options are generally traded over the counter, although some trade on exchanges. To make better
trades using European options, a trader will need to establish a margin account through a broker.
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