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LSDefine
Simple English definitions for legal terms
European option
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A quick definition of European option:
An option is a choice or right to do something. For example, when you go to a restaurant, you have the option to choose what you want to eat. In finance, an option is a contract that gives you the right (but not the obligation) to buy or sell something at a certain price within a certain time period. There are different types of options, such as European options that can only be exercised on the expiration date, and American options that can be exercised at any time.
A more thorough explanation:
An European option is a type of financial contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a fixed price on a specific date in the future. The key difference between European and American options is that European options can only be exercised on the expiration date.
For example, let's say you buy a European call option on a stock with a strike price of $50 and an expiration date of December 31st. If the stock price rises above $50 before December 31st, you can exercise your option and buy the stock at the lower strike price. However, if the stock price doesn't rise above $50 before December 31st, your option will expire worthless.
Another example of a European option is a put option on a commodity like gold. If you buy a put option on gold with a strike price of $1,500 and an expiration date of June 30th, you can exercise your option and sell gold at the higher strike price if the market price falls below $1,500 before June 30th.
Overall, European options are useful for investors who want to hedge their risks or speculate on the future price movements of an underlying asset.