Canadian Securities Course (CSC) Level 1 Practice Exam

What is the difference between an American-style option and a European Style option?

1. American style options can be exercised any time. European style can only be exercised on expiration date.

2. American style options can only be exercised on the expiration date while European style can be exercised any time.

3. American style options involve commodities, while European style options involve equities.

4. American style options are always related to energy products, while European style options are related to currencies.

The correct answer is: American style options can be exercised any time. European style can only be exercised on expiration date.

American-style options are characterized by the flexibility that they can be exercised at any point up until their expiration date. This allows the holder to take advantage of favorable market conditions whenever they arise. In contrast, European-style options can only be exercised at the expiration date, which limits the holder's ability to react to market movements during the life of the option. This key difference significantly influences trading strategies, as American-style options tend to offer more opportunities for profit realization through timely exercise. The question illustrates a fundamental aspect of options that traders must understand when making decisions about their investments. It's essential to recognize these distinctions, as they can impact the value and strategy associated with different types of options in the market.