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American Vs European Options
In this section, let us discuss the two common types of Options: American and European Options.
Initially when option was introduced in India, there were two types of options available – European and American Options. All index options (Nifty, Bank Nifty options) were European in nature and the stock options were American in nature.
The difference between the two was mainly in terms of ‘Options exercise’.
European Options – If the option type is European then it means that the option buyer will have to mandatory wait till the expiry date to exercise his right. The settlement is based on the value of the spot market on expiry day.
American Options – In an American Option, the option buyer can exercise his right to buy the option whenever he deems appropriate during the tenure of the options expiry. The settlement depends on the spot market at that given moment and not really depended on expiry.
