Bryan Perry

A 'World' of Different Option Exercise Types

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Even when it comes to options trading, the American standard of freedom of choice is evident. There are several types of options exercise styles, but the most common ones are American and European. The differences aren't "worlds" apart, but they are significant when it comes to determining the best style for you to trade.

All options have an underlying security, whether it is a stock, index or Exchange-Traded Fund, and this is what typically differentiates which expiration style its options will have. For instance, all standardized equity options use American-style exercise.

An American-style option may be exercised at any time before it ceases trading on what's called "expiration Friday," which typically falls on the third Friday of each month. For instance, if you hold the Apple (AAPL) January 140 Calls, you can exercise them at any time between now and the pre-designated expiration date.

As a call buyer, you have the right to purchase shares at $140 at any time during the life of your trade. This right comes in pretty handy if the stock spikes 10 points because you're able to own the shares at a discount to the market value.

An option with European-style exercise, however, may be exercised only at the expiration date, which is typically the last Thursday before the general expiration Friday -- a day earlier than American options. The opening price on the third Friday of the month is used as the settlement price for European-style options.

In contrast to equity and ETF options, most index options and commodities use European-style exercise -- although there are exceptions such as the S&P 100 Index (OEX), whose options have American-style exercise.