An American option is a type of financial derivative contract that gives the holder (buyer) the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a predetermined price (strike price) at any time before or on the option’s expiration date. The term “American” in American option signifies that the option can be exercised at any point before or on the expiration date, as opposed to a European option, which can only be exercised at the expiration date.

Here are key features and characteristics of American options:

1. **Exercise Flexibility:**
– One of the defining features of American options is their flexibility in terms of exercise. The option holder can choose to exercise the option and buy or sell the underlying asset at any time before or on the expiration date.

2. **Underlying Asset:**
– American options can be written on various underlying assets, including stocks, stock indices, commodities, and currencies.

3. **Call and Put Options:**
– There are two types of American options: call options and put options.
– **Call Option:** The holder of a call option has the right to buy the underlying asset at the strike price.
– **Put Option:** The holder of a put option has the right to sell the underlying asset at the strike price.

4. **Expiration Date:**
– American options have a specified expiration date, which is the last date on which the option can be exercised. The expiration date is typically stated when the option is created.

5. **Strike Price:**
– The strike price is the price at which the underlying asset can be bought (for call options) or sold (for put options) if the option is exercised. It is predetermined at the time the option is created.

6. **Premium:**
– The buyer of an American option pays a premium to the seller (writer) for the right to exercise the option. The premium is influenced by factors such as the current market price of the underlying asset, the option’s strike price, and the time remaining until expiration.

7. **Early Exercise Risk:**
– The early exercise feature of American options introduces the risk of the option holder exercising the option at a time that may not be optimal. This is particularly relevant for call options on dividend-paying stocks.

8. **Risk Management:**
– American options can be used for various purposes, including speculation, hedging, and risk management. Traders and investors often use options to gain exposure to price movements in the underlying asset while managing their risk.

It’s important for investors and traders to understand the terms and conditions of American options, including the specific rules regarding exercise, as these can vary based on the terms of the option contract and the rules of the exchange where the option is traded.