The Securities and Exchange Board of India (Sebi) has now allowed the bourses to introduce the European style of trading stock options. Till now, only the American style was being used at the exchanges.
Under the current style, a buyer can exercise the contract at any time during its tenure. However, in the European stock option, a buyer can do so only on the expiry day.
As the exercise date is limited in the European option, it removes the uncertainty about possible early execution. The lack of this uncertainty is expected to encourage more investors to trade stock options.
This also makes the pricing and valuation simpler than that of the American option. While the ability to execute an American option at any time during the contract makes it more flexible, it also renders it more expensive.
Investors may not have the freedom to choose between these two styles as Sebi has asked the stock exchanges to opt for only one of these. Once they have chosen an option, they will not be able to switch to the other without the approval from Sebi.
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