Even when it comes to options trading, the American standard of freedom of choice is evident. There are several types of options exercise styles, but the most common ones are American and European. The differences aren’t “worlds” apart, but they are significant when it comes to determining the best style for you to trade.

All options have an underlying security, whether it is a stock, index or Exchange-Traded Fund, and this is what typically differentiates which expiration style its options will have. For instance, all standardized equity options use American-style exercise.

An American-style option may be exercised at any time before it ceases trading on what’s called “expiration Friday,” which typically falls on the third Friday of each month. For instance, if you hold the Apple (AAPL) January 140 Calls, you can exercise them at any time between now and the pre-designated expiration date.

As a call buyer, you have the right to purchase shares at $140 at any time during the life of your trade. This right comes in pretty handy if the stock spikes 10 points because you’re able to own the shares at a discount to the market value.

An option with European-style exercise, however, may be exercised only at the expiration date, which is typically the last Thursday before the general expiration Friday — a day earlier than American options. The opening price on the third Friday of the month is used as the settlement price for European-style options.

In contrast to equity and ETF options, most index options and commodities use European-style exercise — although there are exceptions such as the S&P 100 Index (OEX), whose options have American-style exercise.

So, if you bought the Dow Jones Industrial Average (DJI) October 129 Calls, you could only exercise them on their mid-October expiration date. But if you instead held calls on a Dow component stock — such as American Express (AXP) — you could exercise them during any day that the market is open.

However, no matter what the option’s exercise style is, you can choose to close your option trade at any time without exercising the right (but not the obligation) that comes with it.

Of course, while European options can never be exercised early, American options are rarely exercised early. This stems from an option’s non-negative time value, which means options are usually worth more unexercised — this is especially true when traders write (or sell to open) option trades and with credit spreads (in which a trader sells a higher-cost option and buys a lower-cost option in the same underlying instrument, which allows them to initiate a lower-risk trade in which they can collect the trade’s full value upfront).

When examining the differences between American and European options, valuation also comes into play. European options are typically valued using a simple equation that has become standard among analysts, called the Black-Scholes, or the Black model, formula. Valuation for American options again plays to the theme of “freedom to choose,” as they are valued using a host of models to approximate the price, and there is no “standard” option pricing model.

For investors, this means that with otherwise-identical American and European options (that is, with the same strike price, expiration date, etcetera), the American option will be worth at least as much as the European. If it is worth more, then the difference can predict the likelihood of early exercise.

Because American-style options can typically have higher value and offer more choices, they are the most popular style of options. But, if neither American nor European options are what you’re after, there is also Asian-style options exercise. They’re also called “average options,” and their payoff relates to the average value of the underlying stock on a specific set of dates during the life of the option trade. However, their exercise is usually European in style.

With all of the emphasis on globalization, options traders might be tempted to try the different options styles. But for the newer options trader, this is one time when being “domestically inclined” could likely be more profitable.

If you enjoyed this article, check out Bryan Perry’s “ETFs Give Traders Even More ‘Options'” and “Dividend Yields Can Impact Option Values.”