InvestorQ : Can you explain the difference between a European call option and an American call option?
Nishant Chandani made post

Can you explain the difference between a European call option and an American call option?

Answer
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Abhi Yadav answered.
1 year ago


A call option or a put option becomes European or American based on whether the option can be exercised on the expiry date only or can be excised at any time before the expiry date. Here we need to understand that exercise of the option is different from closing your options position, which is based on market liquidity. Before understanding European and American call option, let us first understand the concept of exercise of call option. When you buy a call option, you have two choices in front of you. Either you can reverse a call option (sell if you have bought it and buy if you have sold it) in the market or you can go to the exchange and exercise the call option.

An option that can only be exercised on the settlement date is called a European option while an American option can be exercised on or before the settlement date. In the past, stock options were American while Index options were European. Now all options have shifted to being European options only. The big advantage of European options is that the risk of assignment does not exist for option sellers, which used to be a major pain point for the American options.