Calls and Puts: The European Option

The European option is a unique variation on the traditional option model. The option gives an investor the right to purchase or sell something at a given price. There are many variations on the option process and one of the most popular types of options is the European option. Here are a few things that you need to understand about the European option if you are considering using one in the future. 

Unique Feature

The European option is like every other option in that it gives you the right to buy an asset at a specified price. However, where it differs from other types of options is in the timing. The European option makes it to where you can only buy or sell the asset on a specified date. If you choose to exercise the option, you can do so only on that specific day. It is not available any earlier and if you go past the date, the option is expired. Therefore, you will have nothing to show for your investment if you go past the date. The premium that you paid for the option would simply be kept by the person that sold it to you and you both move on. 

How to Purchase

Most European options are not sold and purchased in the way that other options are. Most of them are sold in over-the-counter transactions with major brokers. However, some types of European options are traded or sold on exchanges. Many other types of options are traded freely on exchanges, so this makes the European option a little different than other types. 

Pricing

Many kinds of options can be difficult and complex to price because of the complicated nature of multiple variables. When you can only exercise an option on a certain date in history, it makes pricing the option a lot easier. This reduces the amount of variables and allows for easy value calculations. This also makes your buying and selling decisions a lot easier because you know exactly what it should be worth at the moment. 

How to Trade

In order to get involved with European options, you will most likely need to get a margin trading account with a broker. Some of them allow for the trading of European options as well as a vast array of other kinds of options. Not all brokers have this type of option available, so you will want to do some research before you choose a broker. 

Keep in mind that even though European options are more simple to price, that does not mean that they are a simple investment tool. It is still very hard to predict where a certain asset's value will be at a date in the future. Therefore, there is some inherent risk associated with this strategy that you cannot get around. Just be prepared for the risk and it can bring with it some great rewards. 

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