{"id":5849,"date":"2019-02-05T08:33:13","date_gmt":"2019-02-05T08:33:13","guid":{"rendered":"https:\/\/www.wasteyourtime.co\/?p=5849"},"modified":"2020-07-22T09:53:59","modified_gmt":"2020-07-22T08:53:59","slug":"european-call-option","status":"publish","type":"post","link":"https:\/\/traders-paradise.com\/magazine\/2019\/02\/european-call-option\/","title":{"rendered":"A European Call option &#8211; What is it?"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_74 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/european-call-option\/#There_are_many_differences_between_European_and_American_styles_in_trading_call_options_Here_are_all\" >There are many differences between European and American styles in trading call options. Here are all.<\/a><ul class='ez-toc-list-level-6' ><li class='ez-toc-heading-level-6'><ul class='ez-toc-list-level-6' ><li class='ez-toc-heading-level-6'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/european-call-option\/#By_Guy_Avtalyon\" >By Guy Avtalyon<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/european-call-option\/#Formula\" >Formula<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/european-call-option\/#European_call_option\" >European call option<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/european-call-option\/#Solution\" >Solution<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/european-call-option\/#What_does_the_European_style_option_mean_for_the_trader\" >What does the European style option mean for the trader?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/european-call-option\/#When_to_buy_a_European_Call_Option\" >When to buy a European Call Option<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/european-call-option\/#Example_of_a_European_Call_Option\" >Example of a European Call Option<\/a><\/li><\/ul><\/nav><\/div>\n<h4><span class=\"ez-toc-section\" id=\"There_are_many_differences_between_European_and_American_styles_in_trading_call_options_Here_are_all\"><\/span><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-5852 size-full\" src=\"https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/02\/a-european-call-option-what-is-it.jpg\" alt=\"A European call option - What is it?\" width=\"800\" height=\"450\" srcset=\"https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/02\/a-european-call-option-what-is-it.jpg 800w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/02\/a-european-call-option-what-is-it-300x169.jpg 300w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/02\/a-european-call-option-what-is-it-768x432.jpg 768w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/02\/a-european-call-option-what-is-it-370x208.jpg 370w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/02\/a-european-call-option-what-is-it-760x428.jpg 760w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/02\/a-european-call-option-what-is-it-424x239.jpg 424w\" sizes=\"auto, (max-width: 800px) 100vw, 800px\" \/>There are many differences between European and American styles in trading call options. Here are all.<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<h6><span class=\"ez-toc-section\" id=\"By_Guy_Avtalyon\"><\/span><a href=\"https:\/\/www.linkedin.com\/in\/guy-avtalyon-67941b54\/\">By Guy Avtalyon<\/a><span class=\"ez-toc-section-end\"><\/span><\/h6>\n<p>A European call option means an option for the right to buy a stock or an index at a certain price on a certain date. Notice the expression &#8220;on a certain date.&#8221; This &#8220;European style call option&#8221; is different from the &#8220;American style call option&#8221; that can be exercised at any time &#8220;BY a certain date.&#8221;<\/p>\n<p><span style=\"font-weight: 400;\">A European call option provides the investor with the right to purchase an asset, while a put option provides the investor with a right to sell it.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In other words, unlike an <a href=\"https:\/\/en.wikipedia.org\/wiki\/Option_style\">American option<\/a>, the European option has no flexibility in the timing of exercise.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"Formula\"><\/span><b>Formula<\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">In theory, a European option has a lower value than an otherwise equivalent American option. It is because a European option does not enjoy the convenience that arises from the flexibility in the timing of exercise.<\/span><br \/>\n<b><\/b><\/p>\n<p><b>Value of a European Call Option = max (0, Asset Price \u2212 Exercise Price)<\/b><br \/>\n<b>Value of a European Put Option = max (0, Exercise Price \u2212 Asset Price)<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Asset price is the price of the underlying financial asset at the exercise date.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The exercise price is the price at which the option entitles its holder to sell or purchase the underlying financial asset.<\/span><br \/>\n<b>Some examples<\/b><\/p>\n<h2><span class=\"ez-toc-section\" id=\"European_call_option\"><\/span><b>European call option<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">To differentiate between a European call option and an equivalent American call option we have to compare them here.<\/span><br \/>\n<span style=\"font-weight: 400;\">Let&#8217;s say, a trader bought 100 American call options stock. The option has an exercise price of $42 and an expiry date of 27 July 2018. The trader believes that stock price on 24th, 25th, and 26th of July is expected to be $43.5, $44.5, and $43. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">Assuming a trader is very confident in owns projections, what is the maximum can gain on the options and when should exercise them? <\/span><\/p>\n<p><span style=\"font-weight: 400;\">Since trader bought American options, he\/she can exercise them at any time before 27th. Based on the projections:<\/span><br \/>\n<b><\/b><\/p>\n<p><b>Value on 24th = max [0, $43.5 \u2013 $42] = $1.5<\/b><br \/>\n<b>Value on 25th = max [0, $44.5 \u2013 $42] = $2.5<\/b><br \/>\n<b>Value on 26th = max [0, $43 \u2013 $42] = $1<\/b><\/p>\n<p><span style=\"font-weight: 400;\">The trader should exercise the options on 25th and gain $2.5 per option.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But, the trader bought European options, and he\/she would have been able to exercise them only on 26th July 2018 for a gain of $1 per option.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Assume that traders used European options instead of American options.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"Solution\"><\/span><strong>Solution<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Since trader purchased European options which she can exercise only on the exercise date i.e. 26th July 2018 and not before, trader&#8217;s gain per option will be only $1 (i.e. option value at the exercise date = price of underlying asset ($43) minus exercise price ($42). <\/span><\/p>\n<p><span style=\"font-weight: 400;\">If the trader had bought American options, he\/she could have exercised them on 25th July 2018 (the day it offered maximum gain) for per option gain of $2 (= $44.5 \u2212 $42).<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Like their American Option counterparts, a European option is traded on an exchange. The contract will specify at least four variables.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Underlying Asset: \u00a0stock indexes, foreign currencies, as well as derivatives.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Premium: the price paid when an option is purchased or sold.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Strike Price: identifies the price at which the holder of the contract has a right to sell (put option) or buy (call option) the underlying asset.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Maturity Date: also referred to as the expiry date; the option no longer has any value if not exercised on this date.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">As is the American Options, European-style options also come in two basic<a href=\"https:\/\/traders-paradise.com\/trading-dictionary\/o\/option\/\"> forms<\/a>:<\/span><\/p>\n<p><b><i>Call Options<\/i><\/b><span style=\"font-weight: 400;\">: also named calls. This contract gives the holder the right to purchase the asset at the strike price on the maturity date.<\/span><\/p>\n<p><b><i>Put Option<\/i><\/b><span style=\"font-weight: 400;\">: also named puts. The contract gives the holder the right to sell the asset at the strike price on the maturity date.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Most stock or equity options in the U.S. are American Styles, whereas most index options traded in the U.S. are European style. Since you can&#8217;t actually &#8220;exercise an index option&#8221; and by the index, index options are cash-settled. Cash-settled means that your broker simply deposits the &#8220;in the money&#8221; amount at expiration.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_does_the_European_style_option_mean_for_the_trader\"><\/span><b>What does the European style option mean for the trader? <\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">It means that you are concerned ONLY with the price of the stock or index at its expiration. European style options tend to be cheaper than American style options because if a stock spike prior to expiration. An American style call option trader can profit on that increase in value. The European style option trader has to hope the price increase holds until expiration.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"When_to_buy_a_European_Call_Option\"><\/span><b>When to buy a European Call Option<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">If you think a stock price or index is going to go up, then you should buy a call option. Unluckily, you don&#8217;t get to select if you want to buy a European style option or an American style option. That decision is already made by the exchange that the option trades on. Most index options in the U.S are European style. Take a look at the chart below:<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Example_of_a_European_Call_Option\"><\/span><b>E<\/b><b>xample of a European Call Option<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-size: 1rem;\">If you bought an S&amp;P500 Index option, it would be a European style option. That means that you can only <a href=\"https:\/\/traders-paradise.com\/magazine\/2019\/03\/trading-options\/\">exercise<\/a> the option on the expiration date. Of course, it is still an option, which means that you have the right but not the obligation to exercise it.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Obviously, if you have a call option and the Index closes below the strike price on the expiration date then you would not exercise it. And that option would just expire worthlessly. Likewise, if you have a put option on the Index and the Index closes above the strike price on the expiration date then you would not exercise it. And that option would just expire worthlessly, too.<\/span><br \/>\n<span style=\"font-weight: 400;\">Notice in the chart above that the S&amp;P500 Index (SPX) is a European style while the S&amp;P100 (OEX) is American style.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In the U.S., most equity and index options contracts expire on the 3rd Friday of the month. Also, note that in the U.S. most contracts allow you to exercise your option at any time prior to the expiration date. In contrast, most European options only allow you to exercise the option on the expiration date.<\/span><\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>There are many differences between European and American styles in trading call options. Here are all. By Guy Avtalyon A European call option means an option for the right to buy a stock or an index at a certain price on a certain date. Notice the expression &#8220;on a certain date.&#8221; This &#8220;European style call [&hellip;]<\/p>\n","protected":false},"author":4,"featured_media":5853,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"content-type":"","_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[1017,1012],"tags":[404,751,2520,2521,104,2522],"class_list":["post-5849","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-how-to-start-trading-beginners","category-traders-secrets","tag-call-option","tag-european-call-option","tag-european-style-option","tag-example-of-a-european-call-option","tag-trading","tag-when-to-buy-a-european-call-option"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>A European Call option - What is it?<\/title>\n<meta name=\"description\" content=\"A European call option is an option for the right to buy a stock at a certain price ON a certain date, has no flexibility in the timing of exercise.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/european-call-option\/\" \/>\n<meta property=\"og:locale\" content=\"en_GB\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"A European Call option - What is it?\" \/>\n<meta property=\"og:description\" content=\"A European call option is an option for the right to buy a stock at a certain price ON a certain date, has no flexibility in the timing of exercise.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/european-call-option\/\" \/>\n<meta property=\"og:site_name\" content=\"Traders-Paradise\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/TradersParadisecom\" \/>\n<meta property=\"article:published_time\" content=\"2019-02-05T08:33:13+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2020-07-22T08:53:59+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/02\/a-european-call-option-what-is-it-2.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1200\" \/>\n\t<meta property=\"og:image:height\" content=\"800\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Editor\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@Traders_Paradis\" \/>\n<meta name=\"twitter:site\" content=\"@Traders_Paradis\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Editor\" \/>\n\t<meta name=\"twitter:label2\" content=\"Estimated reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"5 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/european-call-option\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/european-call-option\/\"},\"author\":{\"name\":\"Editor\",\"@id\":\"https:\/\/traders-paradise.com\/magazine\/#\/schema\/person\/ce94bb3c5a52307ca7be58f0e7b93ffe\"},\"headline\":\"A European Call option &#8211; 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