American-Style and European-Style Options
Chapters in this video
- 0:00 The cardboard box thought experiment
- 1:18 The geography trap: style is not location
- 2:31 Exercise timing and writer assignment risk
- 3:49 Physical delivery versus cash settlement
- 4:38 Narrow-based index option wild card
- 5:01 Index cash settlement formula and worked example
- 6:47 Rapid-fire exam recap
What this video covers
- Why "American" and "European" refer to exercise style, not the geography of the exchange, the buyer, or the underlying
- When the holder can exercise each style: any business day through expiration for American, expiration only for European
- Why writers of American-style options face early assignment risk every business day, while European-style writers face none until expiration
- Which products use which style: equity and exchange-traded fund (ETF) options are American, broad-based index options are European, and narrow-based (sector) index options can be either
- Why index options settle in cash while equity options settle by physical delivery of the underlying shares
- The cash settlement formula for index options: (index level minus strike price) times the $100 contract multiplier
- How to compute a sample cash settlement, such as a 1,500 strike call with the index closing at 1,520 paying $2,000
Read the full lesson, free
This video's complete written lesson is free to read in the CertFuel app, no signup wall. When you're ready to drill the topic, the full Series 7 course adds adaptive practice questions and spaced-repetition flashcards.