American style can include jeans, cowboy hats, or Jersey accents. In the finance world, American style options refer to how you exercise your stock options. No, we don't mean popping them on a treadmill. Stock options let you buy or sell options later at a set price—and it's a privilege you pay for. If your stock option is American style, you can exercise it at any time. With a European Style stock option, you can only buy or sell at the specific price on a specific date (the expiry date).
Example
Let's say you have an option to buy shares of the company you work for at $75/share. The current asking price for the shares is $100. If you exercise your options and buy, you stand to make $25/share if you turn around and sell right away. But hold on a sec. Your strike price (that’s the $75) has an expiry date. If your options are American style, you can exercise them (make good on that strike price) any ol' time. But if you have European style stock options, you'll have to wait until the day your option expires to exercise it. Silly Europeans.
Related or Semi-related Video
Finance: What are Theta and Theta Decay?10 Views
finance a la shmoop what are they two and theta decay well in Wall Street
parlance theta is just time you know parsley sage rosemary and our nevermind [Parsley, sage and rosemary plants appear]
okay this is time like with a calendar the tea there in theta
it stands for time or tick-tock and in this case theta refers to the amount of
time left on a contract as that contract gets closer to expiring or executing [Timeline of contract expiration date]
well you'd say that the theta decays like a molding old skeleton returning [Decayed skeleton appears in grave]
ashes to ashes dust to dust so yeah when theta decays the amount of
time left on a contract a trade the life of a stock option lessons most commonly
theta decay is applied to the time remaining on stock option contracts
well what theta is it yep example theta all right so let's say you paid five
bucks a share for a call option to buy Comcast shares for 40 bucks a share [Call option for comcast appears]
anytime in the next four and a half months the stock trades today at $34 a
share well if the stock were still at thirty four bucks a share four months [Calendar months fall off the wall]
later ie with only two weeks or a ten trading days left well what would you
guess your call option to buy Comcast at forty bucks a share or six dollars above
where it's currently trading would be worth more than five bucks less you know
way less for that option to be worth anything positive the stock would have
to go above forty or appreciate seventeen and a half percent ish in ten
days and nobody would then pay an incremental five bucks above that figure [Cash thrown onto a fire]
to then buy the shares for an all-in cost of forty five bucks trying to make
money like the stock would have to zoom from 34 to fifty bucks a share to really [Man holding comcast stock]
have a good outcome risk adjusted so as the option got closer to expiring its [Call option moves to expiration date]
value would decay because the optionality got less there's less time
for that stock to break fifty bucks and change if there were a thousand trading
days in the future and the option had notionally like five years before it
expired like enormous theta well then it would likely have sold for
vastly more than five bucks a share you know for that stock option and hey if [Piles of cash appear on table]
you want to see real decay well just check out Simon and Garfunkel lately
looks like they're you know homeward bound [Man discussing Simon and Garfunkel]
Up Next
What is the difference between an American and European style option? The main difference between American and European options is when they can be...
The intrinsic value of an option is the share price of a stock minus its strike price - i.e. the "in the money" amount.
A naked option isn't as risqueé as it sounds...it's just an option you sell without having enough of the underlying security to cover your butt if...