American and European options have similar characteristics but the differences are important. In this article, we'll discuss their characteristics and how options traders can use this knowledge to avoid costly losses.
Key Differences
There are four key differences between American- and European-style options:
Underlying
Tradable commodities/stocks/ETFs trading in U.S.A tend to have American style options while those trading in Europe tend to have European style options.
The Right To Exercise
Owners of American-style options may exercise at any time before the option expires while owners of European-style options may exercise only at expiration.
This is major difference of two different style of options.
Cash Settlement
It's advantageous to all parties when options are settled in cash
The option owner receives the cash value and the option seller pays the cash value of the option. That cash value is equal to the option's intrinsic value. If the option is out of the money, it expires worthless and has zero cash value.
These cash-settled options are almost always European-style and assignment only occurs at expiration, thus the option's cash value is determined by the settlement price.