How Does an American Option Work?

The American option is the most commonly used type of option when dealing with exchange trade options. Here are the basics of the American option and how it works.

American Option

The American option gives you the ability to purchase a certain type of security at a specific price. When you have this type of option, you do not necessarily have to exercise it if you choose not to. The unique feature about this type of option is that you have the freedom to exercise it at any point during the life of the contract. The European option is very similar, except that you can only exercise it on the date of maturity of the contract.

Benefit

This type of option is more preferable than the European option. With an American option, you can make sure that you get the best value for the asset that you have an option contract on. For example, if you purchase an option contract on a particular stock, you can wait until you feel comfortable selling the option contract instead of having to wait until the last day of the option contract. This will allow you to increase your profit on the transaction.

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