Definition
An option's exercise style governs the moments at which the holder is permitted to exercise the contract. An American-style option may be exercised on any trading day up to and including expiration. A European-style option may be exercised only at expiration.
Despite the geographic names, the labels describe contract terms, not where the option trades. Most equity options listed in the United States are American-style, while many broad-based index options are European-style.
Why it matters
How it works
The right to exercise early gives an American option a small premium over an otherwise identical European option, because optionality is never harmful to the holder. In practice, early exercise is rarely optimal for calls except just before a dividend, and for puts when deep in the money and interest rates are high. Most holders capture value by selling the option rather than exercising it. For sellers, knowing the style matters: American-style positions can be assigned at any time, while European-style positions can only be assigned at expiration.