Options: Option styles

OPTION STYLES.

By style we mean the ‘excerciseability’ of an option contract – whether the option contract can be exercised before the expiration date or not.

TWO STYLES: American & European.

Options traded all over the world are divided into two broad styles called American options and European options.

What’s the difference?

An American option can be ‘exercised’ any time before the option expiry. European options can be exercised only on the expiry date.

So, if you have bought a call American style option, you can exercise your right to buy underlying asset anytime between the purchase date and expiry date. Similarly If you have bought a Put American style option, you can exercise your right to sell the underlying asset anytime between the purchase date and expiry date

But in the case you have bought a call/put European style option, you can exercise your right to buy/sell underlying asset only on the expiry date.

How to find out if a particular option is American style or European style?

The SEBI has given the freedom to the exchanges to introduce American or European style options. In India, till Jan 2011, index options were traded in European style while individual stock options were traded in American style. Post, Jan 2011, the NSE decided to switch to European style stock option for all contracts expiring on January 27, 2011 and onwards. So, now in India, all the options available are European style contracts. The ‘option type’ will be displayed against every option contract available. The codes are CE, PE, CA and PA. These codes are very simple to understand.

OPTION CODES.

  • CE = Call option, European style
  • PE = Put option European style
  • CA = Call option, American style
  • PA= Put option, American style.

‘EXCERCISING’ IS DIFFERENT FROM TRADING.

There is one important point to note here. The difference we talked about has significance only in the matter of exercising the right contained in an option. A participant can buy or sell European options in the secondary market any time.  The restriction is only on exercising the right. So, don’t get confused between ‘exercise’ and ‘trading’ of options.

For more details on the options contracts available at the NSE right now, here is the link. This link has all the details like contract specifications, list of underlying stocks , permitted lot sizes etc..

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  1. Options: Kick off
  2. Options: Understanding strike price.
  3. Options: Moneyness.

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