Securities Industry Essentials (SIE) ExamUnderstanding Products and Their RisksMedium
A client holds an American-style call option. Which of the following statements is true regarding its exercise?
- AIt can only be exercised on the expiration date.
- BIt can be exercised at any time up to and including the expiration date.
- CIt can only be exercised if the option is out-of-the-money.
- DIt automatically expires worthless if not exercised before the expiration date.
Show answer & explanationAnswer & explanation
Correct answer: B. It can be exercised at any time up to and including the expiration date.
American-style options give the holder the right to exercise the option at any time between the purchase date and the expiration date. European-style options, conversely, can only be exercised on the expiration date.
Why the other options are wrong
- A. This describes a European-style option, not an American-style option.
- C. Options are typically exercised when they are in-the-money, not out-of-the-money.
- D. While true that options expire worthless if not exercised, the statement refers to the ability to exercise, not the outcome of non-exercise.
American vs. European Options
Refers to the exercise style of an option contract, determining when the holder can exercise their right to buy or sell the underlying asset.
- American-style: Can be exercised at any time up to and including the expiration date.
- European-style: Can only be exercised on the expiration date.
- Most equity options are American-style.
- Index options are typically European-style.
Memory trick: America: Anytime; Europe: End.