Options which can be exercised any day before or on the day of expiry are called as American options, if the options can be exercised only on the last day of expiry, it is called European.
All options on Indian stock exchanges are European.
Let me explain what this means:
Stock X is trading at Rs 102, you buy 100 calls for Rs 3 on say 10th of March, with expiry on 27th of March.
Once you buy this option, assume this option suddenly goes illiquid (no one is trading this option), stock goes to Rs 105, you want to sell the calls you bought, but there are no buyers in the market. What do you do now?
If it was an American option, before the close of market if you tell the broker that you need to exercise this option, you will get back Rs 5 if the closing price of the stock is Rs 105. So you are able to book a profit of Rs 2 on the option.
If it was an European option, you cannot exercise, so what this means that you will be forced to hold this call until a buyer is available or until 27th of March which is the expiry day. So yeah, European options are a lot more restrictive for the option buyer than American option.
Hi Nithin…So if I bought an American option in the above case at 11am then can I exercise it at, say 1pm or I’ll have to weight for the market close of that day to exercise it?