What are Options?
- Type of contract that gives the holder the right, but not obligation, to transact an asset in the future at a specified price and time.
- Types of options: calls and puts
What is an option?
An option is a contract between two parties.
This contract gives the holder the right to buy and sell an asset at a specific price by a specific date. Each contract consists of 100 shares of the underlying asset. However, the holder of the contract is not obligated to exercise their contract but has the right to whenever after they purchase the contract. The date chosen for the contract is the expiration date before the option gets exercised and the chosen price is the price you plan to exercise your contract at. Since options grant holders the right to transact but not obligation to trade their contracts, they must pay a premium for these rights. Based on the risk connected with your specific expiration date and strike price, the premium will fluctuate. As the price of a contract goes up or down, so does the premium associated with the contract. There are 2 types of options: calls and puts. However, there are different types of option orders which can be made. Let’s break down the basics first.