What are option contracts? (The Basics)

An option is a contract that allows a buyer the right to buy or sell an underlying asset or financial instrument at a specified strike price prior to or on a specified date.  The seller has the corresponding obligation to fulfill the transaction if the buyer “exercises” the option.  Each option contract typically represents 100 shares.  Options can be used to hedge risk, speculation, and income generation.

  • Call options:  The buyer of the call option has the right to buy the asset at a specific price on or before the expiration date.   The seller of the call option has the obligation to sell the asset to the buyer at said price on or before the expiration date.
  • Put options:  The buyer of the Put option has the right to sell the asset at a specific price on or before the expiration date. The seller of the put option has the obligation to buy the asset from the buyer at the specified price on or before the expiration date.

 

 

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