European Option Trading: A Basic Guide
New traders must comprehend options. Options are widespread in European finance. This article defines and compares European choices.
A European Choice?
European option holders may purchase or sell an underlying asset at a strike price upon expiry. Only expired European options may be exercised.
American options may be exercised after expiry, whereas European ones cannot. European option traders cannot execute early if it benefits them.
Call/Put Options
Put and call are European options. Call options allow the holder to purchase the asset at the strike price, whereas put options allow selling.
Say you bought a $50 stock call. If the stock price rises over $50, you may purchase shares at the call option price on expiry. If stock stays below $50, exercising your option is unprofitable.
Put option holders may sell shares at the strike price if a stock falls below $50 on expiry. You would not execute your put if the price stays over $50.
Pros and Cons of European Options
European training is cheaper than American owing to its restricted adaptability. They provide traders with lesser budgets cheaper asset exposure.
Limited flexibility may also upset merchants. European option investors cannot exercise early if the asset price rises before expiry.
Conclusion
Europe trades financial derivatives called European options. They provide the holder the right but not the responsibility to purchase (call option) or sell (put option) an underlying asset at a defined price on expiry. European choices are cheaper than American ones and lack early exercise flexibility.
Sources and References
The information in this article is based on the following sources: