American option

Definition

American option in plain English

An option is a contract that gives you the RIGHT (but not the obligation) to buy or sell something at a set price. An American option just means you can "cash it in" whenever you want — any day from now until it expires, like a gift card you can spend the moment you feel like it. That flexibility is valuable, which is why this style is usually worth at least as much as the stricter kind (a European option) that only lets you use it on one specific final day. The name has nothing to do with geography — it's just a label.

Related Principles of Finance terms

• Agency bond
• Arbitrage pricing theory (APT)
• Asset-backed security (ABS)
• Basis risk
• Bid-ask spread
• Bookrunner
• Carhart four-factor model
• Clientele effect
• Collateralized debt obligation (CDO)
• Common-size analysis