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Options American Style

Few are aware but there are actually three distinct classifications of options. All options traded in the United States are America-style. These options allow the holder to exercise at any time on, or prior to the expiration date. After the expiration date the option becomes worthless as a financial instrument.

European-style options are different from the American-style option in that holders are permitted to exercise only during a specified period prior to the expiration date. As you may have guessed by the name, these options are popular in Europe.

The capped option goes one step further; the period for which the option can be exercised is limited and dependent upon the option reaching a capped value prior to expiration. If this value is reached the option is executed automatically.

Given the restrictions of European and Capped-style options most North American investors should be pleased that all options traded here are American-style -- but exercising an option is just one of the two ways to close an open option position.

Both holders and writers of all options can close positions by simply completing an offsetting transaction in the open market prior to expiration. In the case of a holder, the call or put option may be sold in the open market. In the case of a writer, the closing transaction involves buying the identical position that was originally sold.

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