Experienced option traders know that US and European options have a number of features that differ from each other. Even for novice investors, it is important to know the differences between the two types of options.
The US options market is very large and highly liquid. US options therefore have a number of advantages over European options.
Learn the main differences between the different option types and discover the benefits of trading US options.
When does the US Stock Exchange open?
The options available in the European markets differ from those available in the US in several respects. It is worth mentioning here the opening hours of the exchanges.
Most European stock exchanges open in the morning. The main trading hours on US stock exchanges start at 3:30 PM and end at 10 PM Central European Time (CET). For investors in Europe, this means the ability to trade from afternoon to evening.
Also check: How to increase profits and limit losses with options?
Opening hours of stock exchanges in the USA: a benefit for European investors?
Many investors regularly invest in the stock market, but for most of them, trading is not the main source of income. It is often an addition to employment or an alternative to allocating savings. Therefore, many of them tend to plan their trades and check their portfolios in the afternoons and evenings. The later opening hours of the US stock exchange may therefore be an advantage for many of them.
It is important to check your portfolio regularly when trading options. Option prices can change quickly. Currently, trading platforms allow for continuous access to the investment account and from almost any type of device, also from a mobile phone.
The liquidity of options in the US is a benefit of tight spreads
The main argument in favor of US options over European options is often liquidity. Liquidity generally means the ease with which we can buy or sell assets or securities.
The spread is the difference between the bid and ask price. When we buy an option, we pay the ask price. When we sell, we get the bid price. When trading options (or other financial instruments), we want the difference between the bid and ask prices to be as narrow as possible, as it has a direct impact on the profitability of the transaction.
The liquidity of the option can therefore significantly affect your profits. American markets are many times larger than European ones. With more market participants competing, the spreads between the bid and ask prices are very tight. As a result, US options often have narrower spreads than European options. This is also due to the large contract volumes in itraday trading. For example, the average volume of Tesla options traded within 1 day is over 1 million contracts.
Therefore, it is important to understand that indirect costs in the form of spreads have a huge impact on the outcome of our trading strategy. In the long run, it can even be a key factor in whether your strategy is profitable or loss-making.
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US options: huge supply of stocks
Another important aspect is the large number of stocks that can be traded in US markets. In total, around 4,500 stocks are traded in the US and can be traded through options – that’s a really big choice. Most European exchanges only find a fraction of this number, with much less liquidity and much larger spreads.
American options vs. European
Options are often distinguished by type. The most common options are European and American options. This terminology is independent of the country or continent in which the option is traded. It is mainly about how the options are exercised.
The US type of options means that the settlement of the transaction (usually) takes place physically. In practice, physical settlement means that when the option is exercised you either receive or deliver the underlying asset. This type of option can be exercised at any time during its duration, including before its expiry date.
European-style options work differently in several respects. First, they are usually settled in cash. This is due to the fact that the most common underlying instrument in European options is an index. So there is no physical delivery of the underlying assets. Cash settlement means that the option value, as determined by the difference between the strike price and the settlement price, will be entered in the cash account after the expiry date. A typical example of this type of option is options on the AEX index. The AEX price average is determined on the third Friday of each month between 15:30 and 16:00. This average is the settlement price at which the call and put options are settled in cash. Some stocks can be traded with both types of options, so be careful which type you choose.
On the TWS trading platform, information about the type of options available to trade on a given underlying instrument can be easily found by right-clicking. Select Financial Instrument information> Description from the drop-down menu. All important information about the option and how to execute it will be displayed in a new window.
Trade US Options with LYNX
Whether you are a day trader or a long-term trader, you can take advantage of LYNX’s excellent offer as we enable you to trade a wide variety of financial instruments such as stocks, ETFs, futures, options, CFDs and forex at favorable commissions. In addition, we regularly publish training webinars. At LYNX, you can trade in real time through professional trading platforms.
In addition, as part of the Investment Portal, we regularly inform you about current investment opportunities on the market and news from the investment world. In case of any doubts, you can use our customer support for free.
Sources used in the article:
BLEKEMOLEN, J. Handelen in Amerikaanse opties of Europese opties?. LYNX [online]. Published on 9 May 2022 [cit. 11. 7. 2022]. Available at: https://www.lynx.nl/beurs/beurs-koersen/opties/optiehandel/handelen-in-amerikaanse-opties-of-europese-opties/
Make money from falling prices
The stock market does not always go up. There are often times of increased volatility and falling prices. In addition to buying stocks, an investment account via LYNX will also allow you to speculate on declines and open short positions (short selling). Find out more on our website: Short Sale
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