![]() For example, if the option on a stock is trading at $1, the cost of one contract (commissions excluded) would be $100 (100 x $1). One options contract is generally based on 100 shares of the underlying stock. Buyers have the right - but aren't obligated - to buy or sell the security at a predetermined price (strike price) by a certain date (expiry date). Sellers, also known as writers, are obligated to buy (with puts) or sell (with calls) the underlying security if the buyer decides to exercise the option, or if the option expires in-the-money. Typically, options contracts are very short, such as 30, 60 or 90 days, but can have expiration dates of up to a year.Īn options trade always has two sides: a buyer and a seller. In the case of stocks, which we'll focus on here, you might choose a call option if you think a stock will rise, or a put option if you think it will fall. Options investors generally have an opinion on the future price of an asset, believing it will rise or fall. An easy way to keep them straight is to remember that a call would "call" an asset away, while a put would "put" it to someone else. Owning a call gives you the right to buy the underlying asset owning a put gives you the right to sell that underlying asset. ![]() There are two main types of options contracts: calls and puts. Options are securities themselves, like a stock or bond, and because they derive their value from something else, they're called derivatives. Options are essentially contracts between two parties that give holders the right to buy or sell an underlying asset at a certain price within a specific amount of time.Īn option's value is tied to the underlying asset, which could be stocks, bonds, currency, interest rates, market indices, exchange-traded funds (ETFs) or futures contracts. ![]()
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