All trading basics

Types of Options

Options have two main types of exercise styles:

  • American options can be exercised at any time between the date of purchase and the expiration date. Our example about Cory's Tequila Co. is an American option. Most exchange-traded options are of this type.
  • European options are different from American options in that they can only be exercised at the end of their life and not before.

The distinction between American and European options has nothing to do with geographic location.

Expiration dates

Options can be broken down into 3 categories based on their expiration dates: regular options, weekly options and long-term options.

Regular options

Traditionally, options are issued with monthly expiration dates ranging from 1 to 9 months. These options expire on the third Friday of the month in question.

Weekly options

Weekly options expire every week, creating new opportunities for investors to generate additional income and improve returns. With the exception of the expiration date, weekly options have the same features as regular options. They are only available on a limited number of securities.

Long-Term Options

With long-term options, investors can use longer term strategies since they expire in 1, 2 or 3 years. Long-term options become regular options when they have 9 months until they expire. With the exception of the expiration date, long-term options have the same features as regular options and are only available on a limited number of securities.

These options are called LEAPS (which stands for Long-term Equity AnticiPation Securities). By providing opportunities to control and manage risk or even speculate, they are virtually identical to regular options. LEAPS, however, provide these opportunities for much longer periods of time. Although they are not available on all stocks, LEAPS are available on most widely-held issues.

Exotic Options

The simple calls and puts we've discussed are sometimes referred to as "plain vanilla" options. Even though the subject of options can be difficult to understand at first, these "plain vanilla" options are as easy as it gets!

Because of the versatility of options, there are many types and variations of options. Non-standard options are called exotic options, which either are variations on the payoff profiles of the plain vanilla options or are wholly different products with "option-ality" embedded in them.