European Option Mechanics

European option mechanics define the rules for options that can only be exercised at the expiration date, unlike American options which can be exercised at any time. This limitation simplifies the pricing model, as it removes the complexity of early exercise decisions.

In the crypto derivatives space, many cash-settled options are structured as European style to streamline the settlement process on-chain. Understanding these mechanics is crucial for traders to calculate the payoff structure and determine the appropriate entry and exit points.

The value of a European option is driven by the intrinsic value at expiration and the time value, which decreases as the expiration date approaches. This structure is central to the design of many decentralized options protocols.