European Style Stock Options

European Style Stock Options
By www.options-trading-education.com

In trading European style
options, an options contract
can only be exercised on
expiration of the options
contract.

http://www.options-trading-education.com/7061/european-
style-stock-options/

When trading exchange-
traded options in the USA,
standardized stock options
contracts typically consist of
one hundred shares of the
stock.


Contract lengths are
standardized.


Although European style stock
options can only be exercised
at expiration,


unlike American style options,
one can exit a European style
stock options contract at any
time during the contract
period.


Thus a stock options trader
can execute the opposite to
trade and pocket his profits or
limit his losses without
waiting until the end of the
contract period.


The difference in execution of
options trades between
European style stock options
and American style stock
options can be significant for
stock investors.


Buying Calls with European
Style Stock Options


A call gives the purchaser the
right to purchase the
underlying stock at a set price
as defined by the contract.


This price is called the strike
price. In the case of European
style stock options this can
only happen at the end of the
contract term.


With an American style
options contract the
purchaser can execute the
contract at the most
opportune time during the
contract period.


An issue arises here for an
investor who expects to be
able to use a call option to
take advantage of an expected
rise in a stock price.


If the stock price moves up
rapidly the investor may
choose to execute the
contract and buy the stock.


He wants to keep the stock
but is concerned about a
reversal.


As such he can buy puts on
the stock to protect his gains
while still holding the stock.


This is not possible in trading
as one cannot execute the
contract and take the stock
prior to expiration.


The only way to guarantee a
profit when the options
contract price rises is to exit
the contract and take a profit
but not hold the stock.


This may be limiting for a
number of stock options
trading strategies.


Buying Puts with European
Style Stock Options


A put gives the purchaser the
right to sell the underlying
stock at the strike price no
matter how far it might fall.


In the case of trading
European style stock options,
one can only sell at expiration.


An investor who has seen his
stock rise dramatically over
several months may choose to
purchase puts on the stock.


By doing so he can sell at the
current price no matter how
far the price might fall.


In trading American style
stock options a trader can
execute the contract and sell
stock if the price falls
markedly.


He does not need to wait until
the expiration of the contract.


On the other hand in trading
the only way to deal with a
dramatic loss is to sell the


options contract for a profit
and use the profit to
compensate for losses with
the stock itself.


Stock option trading with
European style options can be
profitable but investors and
traders must also understand
the limitations.


European Style Stock Options

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