A European option is the type of options contract that allows investors to exercise their options only on the expiration date of that contract. The contract holder has the right to buy or sell the underlying securities for a specified price; it is known as the strike price of the option.
European alternatives are less adaptable than their American counterparts, but they are more predictable. This article will explain how European options function and how they can be added to an investor's portfolio.
A European option is the type of options contract that allows the option holder to exercise the option only on the expiration date of the option. Option holders have the right but not the obligation to exercise their options. They can also choose not to use the option and let it expire.
The option holder can exercise a call option to buy shares at the strike price if it is a call option. They can execute the option to sell shares if it's a put.
There are two types of European options, and they are:
Alternatives to European alternatives are primarily available in the United States. When the option holder can execute the contract is the key difference between the two.
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European Option |
American Options |
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It is practicable only on the expiration date. |
It is exercisable any time before the expiration. |
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It has less flexibility, and they are generally worthless and have a lower premium when compared to the American options. |
It has more flexibility, which means they are generally worth more and commands a higher premium compared to the European options. |
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Usually, some index options that are available in the US are European options. |
Typically, most US stock options are American options. Usually, they are traded on exchanges. |
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The formula for European Call Option: Price Call = P0N(d1) – Xe-rtN(d2) |
Formula for European Put Option: Price Put = Xe-rt *(1-N(d2)) – P0*(1-N(d1)) |