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.

Long-Term Options

So far we've only discussed options in a short-term context. There are also options with holding times of one, two, or multiple years, which may be more appealing for long-term investors.

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.