An American option is a type of financial contract that gives the holder the right to either buy or sell an underlying asset at a specified price on or before a specified date. American options can be exercised at any time prior to their expiration date, while European options can only be exercised on the expiration date itself.
American options are important because they allow investors to more effectively manage risk. For example, if an investor holds a European option and the underlying asset’s price begins to decline sharply, the investor may not be able to exercise the option in time to avoid losses. However, if the same investor held an American option, they could exercise it immediately and lock in a profit.
Overall, American options give investors more flexibility and control when compared to European options. This makes them a popular choice for many different types of investors.