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Types of Options
Options have two main types of exercise styles:
- American options can be exercised at any
time between the date of purchase and the expiration date.
Our example about Cory's Tequila Co. is an American option. Most exchange-traded options
are of this type.
- European options are different from American
options in that they can only be exercised at the end of
their life and not before.
The distinction between American and European
options has nothing to do with geographic location.
Long-Term Options
So far we've only discussed options in a short-term context.
There are also options with holding times of one, two, or multiple
years, which may be more appealing for long-term investors.
These options are called LEAPS (which stands for Long-term Equity
AnticiPation Securities). By providing opportunities to control
and manage risk or even speculate, they are virtually identical
to regular options. LEAPS, however, provide these opportunities
for much longer periods of time. Although they are not available
on all stocks, LEAPS are available on most widely-held issues.
Exotic Options
The simple calls and puts we've discussed are sometimes referred
to as "plain vanilla" options. Even though the subject of options
can be difficult to understand at first, these "plain vanilla"
options are as easy as it gets!
Because of the versatility of options, there are many types
and variations of options. Non-standard options are called exotic
options, which either are variations on the payoff profiles
of the plain vanilla options or are wholly different products
with "option-ality" embedded in them.
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