Explained: European vs. American Options

Key Takeaways:

• European and American stock options work similarly in crypto. 

• The difference between the two types of options is that European options contracts expire on the date of expiration at a specific price, while American options can be exercised at any time before the contract expires.

• A European-style contract requires higher accuracy in terms of speculation than its American counterpart. 

How Do European Options Work?

European-style options contracts mandate the holder to fulfill the terms of the agreement on the date of expiration. Even if a contract is in the money, the holder can't exercise their option until the set date, at which point the fortunes of the contract may have reversed.

• Exercise Rights: The options contract holder holds the right to exercise the contract. Depending upon their strategies, contract holders can exercise an option before it expires to collect dividends. 

• Settlement Price: There is no involvement of the underlying asset. The option’s payoff is determined by the difference between the final settlement price and the strike price, and the final settlement price is calculated using the average index price just 30 minutes before the option expires. 

How Do American Options Work?

American crypto put and call options give investors the right to exercise the contract to buy or sell an asset at any time within a given time frame before the contract expires.

• Exercise Rights: This type of option gives holders the privilege of exercising the contract before the expiration date. If a contract is ITM, the holder can decide to use their trade option, thereby making a profit.
• Settlement Price: There is no involvement of the underlying asset. The option’s payoff is determined by the difference between the final settlement price and the strike price, and the final settlement price is based on the current index price during the Option’s expiration. 

American options require a lower degree of accuracy in terms of speculation than European options, since turning a profit only requires the contract to be ITM at any time between the date entered and the expiration date.

Summary

American and European crypto options share similarities in terms of their underlying assets. However, determining settlement price is different. European crypto options have a higher learning curve, so traders are advised to learn about their mechanics before investing in them. 

Learn more:

• What Are Bitcoin Options: How to Own The World’s No. 1 Crypto for Less