What is the main difference between American and European options?

The main difference between American and European options lies in the exercise rights granted to the holder. American options allow the holder to exercise their option at any time before the expiration date. This feature provides greater flexibility for the option holder since they can take advantage of favorable market conditions whenever they arise prior to expiration.

In contrast, European options can only be exercised at expiration, which limits the opportunity to benefit from price movements in the underlying asset before that specific date.

Understanding this distinction is crucial for option traders, as the choice between American and European options can significantly influence the strategy and potential profitability of their trades. The flexibility of exercising an American option at any time can be particularly advantageous in volatile markets.