A European option is an options contract that can only be exercised on its expiration date, unlike American options which can be exercised at any time before expiration. This exercise restriction typically makes European options less expensive than equivalent American options due to reduced flexibility. Most index options and many cash-settled options use European-style exercise.

European options are commonly used for hedging and speculation where early exercise is not required or desired. The restricted exercise feature simplifies option pricing models and reduces the complexity of risk management for option writers. Many exotic options and structured products incorporate European-style exercise terms.

Real-world example: An investor buys European-style SPX index options for portfolio hedging, knowing they can only exercise on expiration day, which suits their strategy of holding protection until a specific future date.