how american options work
american options outline the timeframe when the option holder can exercise their option contract rights these rights allow the holder to buy or sell depending on if the option is a call or put the underlying asset at the set strike price on or before the predetermined expiration date since investors have the freedom to exercise their options at any point during the life of the contract american style options are more valuable than the limited european options however the ability to exercise early carries an added premium or cost the last day to exercise a weekly american option is normally on the friday of the week in which the option contract expires conversely the last day to exercise a monthly american option is normally the third friday of the month 1the majority of exchange traded options on single stocks are american while options on indexes tend to be european style the names american and european have nothing to do with the geographic location of the option but only apply to the style of rights execution american call and put optionsa long call option gives the holder the right to demand delivery of the underlying security or stock on any day within the contract period this feature includes any day leading up to and the day of expiration as with all options the buyer does not have an obligation to receive the shares and is not required to exercise their right the strike price remains the same specified value throughout the contract if an investor purchased a call option for a company in march with an expiration date at the end of december of the same year they would have the right to exercise the call option at any time up until its expiration date american put options also allow the execution at any point up to and including the expiration date this ability gives the buyer the freedom to demand the seller takes delivery of the underlying asset whenever the price falls below the specified strike price one reason for the early exercise has to do with the cost of carry or the opportunity cost associated with not investing the gains from the put option when a put is exercised investors are paid the strike price immediately as a result the proceeds can be invested in another security to earn interest however the drawback to exercising puts is that the investor would miss out on any dividends since exercising would sell the shares also the option itself might continue to increase in value if held to expiry and exercising early might lead to missing out on any further gains 