The call or put option one can exercise before and after its expiry date is known as an American option.
Options contracts are options trading typically involve a maturity date. It means that you can exercise them according to their maturity date.
There is one difference, however. A trader can exercise most options only when they mature. But it is not true for the American Option. The best part about them is that you can trade them before or after their expiry.
Let us find out more about American Options.
American Options in a nutshell
- American options can be exercised before or after expiry.
- Two types: American call option and American put option.
- Benefits include early exercise, ownership of stocks, and dividends.
American options explained
The derivate contract, American Options, is a contract that traders can exercise at any time. It does not matter whether it has reached its maturity or not.
The holders can benefit from exercising the Option even before it expires or matures. They are higher in value than the European Options. It is because you can exercise their European counterparts when they mature.
While trying to exercise American Options before their due date, you will have to pay a premium.
You will find two kinds of American Options in the market, including:
- American call option
An investor can exercise these derivate contracts any time before they mature. Hence, one can immensely benefit from exercising these if they choose the most favorable time.
- American put Option
The put option is the stark opposite of the call option. While holding a put option, a trader can exercise these before they expire or on their expiry day.
Benefits of an American option
You must be wondering why people hold these options. Well, the American Option offers plenty of benefits to the investors.
These include the following:
- We know that an investor can exercise these before the expiry day. It indicates that he can exercise it before the ex-dividend date.
- It makes them own the stocks and, finally, receive a dividend for the subsequent period.
- Holding and exercising options contracts ensure their maximum market participation. It also makes it easier for the investors to fill their pockets with high profits.
Example of an American Option
Let us assume you purchased an American Option for Apple. You purchased this in March with expiration in December.
The Options contract is on sale with a premium amounting to $5, with one contract having 100 shares. Let us assume the strike price at $100.
After you buy the Options contract, the stock price increases to $150. It is a good chance for you to sell your Options contract and pocket a profit of $50 each. Since you can sell the American Option before its expiry, you sell it right after purchasing.
This transaction brings you $5,000 in total. You can subtract the premium amount you paid or any broker commission from these earnings.
How can you buy American options?
An investor can trade American Options to have a lot at his disposal. However, the types of Options you get in the market often depend upon supply and demand. It also depends upon the exchange and the asset.
There are no index and currency options available at the moment. So, a trader should feel satisfied with whichever option he gets.
American Options vs Binary Options – What is the difference?
American options are a variant of an option contract that allows the investor to exercise the option rights at any time before and during the expiry date.
A Binary Option is a financial product known as the “All-Or-Nothing” option where the outcome is based on two different options. You can win a high return or lose your investment amount. It is a simple “yes or no” option, which is why it is called “binary”.
