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...in other words, why would a person want to have the right to exercise an option early? What advantage does that really give you? Are Euro-style options not good enough for some people? Who are these people and what kinds of risks are they trying to hedge?

Google turns up no results about this; everything is either "Definition of American Option" or "Here's a model for pricing American options." Nothing about the practical uses of the derivative.

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    $\begingroup$ I'd imagine it has more to do with how markets developed in Europe vs America. Since we are discussing exchange traded options, in the interest of uniformity (and thereby liquidity), option regulators generally define set criteria for option contracts. So whether an option is american or european in nature can very well be a supply-side effect. From usage perspective, since one can always unwind the position in secondary market, I don't suppose this is a demand-side effect. $\endgroup$
    – Uditg_ucla
    Jan 31, 2016 at 10:47
  • $\begingroup$ optionsplaybook.com/managing-positions/early-options-exercise $\endgroup$
    – JeffO
    Mar 2, 2016 at 19:47

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Well stock prices change all the time when markets are open. American options give you the opportunity to exercise it at any time up until maturity, whereas a European option only allows you to exercise it at a specific date and time. A simple example is to compare an American option that matures in 1 day and European option where it matures at the last minute the market is open ie. 3:59:00PM.

Stock prices don't always close at their highest level, and sometimes may close at a net loss. The benefit of the American option is that whenever you think the stock price is going to be the highest you can exercise it anytime throughout the day. While the European option-you have to take the price at exactly 3:59:00PM even if it wasn't the highest price in the day. In this example, the American option gives you an opportunity to reap a higher upside.

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One example could be someone using option strategies and its underlying dividends. In these cases, the trader could use early excersise to capture the dividend value. Google it for more information.

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In some local exchanges there are American-style options only.

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  • $\begingroup$ Which tends to support Uditg_ucla's suggestion that it has to do with historical traditions and established market practices, rather than any substantial advantages or disadvantages of one form over the other. $\endgroup$
    – nbbo2
    Nov 23, 2016 at 14:30

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