Difference between European and American options

Question

Appreciate some help with a problem i am facing

OK, so first I found a put and call option with same strike price and maturity for both American-style and European-style options. I selected the ones closest at-the-money with a maturity of 36 days. Data looks like this for the European:

S 611,1 : X 610 : R 0,09 : T 0,098630137

call price 7,85 : put price 0

And for the American:

call price 11,7
put price 12

theoretical minimum put price: 5,209167313

My question is: What is the reason for the difference between American style and European style options when they have the same exercise price and maturity?

Appreciate all help! Thanks!

Tom

Answer 1

The key difference between American and European options relates to when the options can be exercised:

• A European option may be exercised only at the expiry date of the option, i.e. at a single pre-defined point in time.
• An American option on the other hand may be exercised at any time before the expiry date.

This is why American options are in general more expensive because the are exercisable any time.

Answer 2

An American option gives you the opportunity to capture a dividend payment. e.g. a $1 dividend is ex-div prior to the option expiration. The call buyer may exercise early and get that dividend as well. This is the one difference in value I can cite.

There may be other reasons for early exercise having value, I'm just not aware of them.