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An Overview of Option Contracts

2020-04-03 08:22
Video Tutorial

What is an Option?

An option is a financial instrument that allows traders to buy or sell the underlying asset at a predetermined price, either before or at a certain date. Options can be based on a wide range of underlying assets, including stocks, commodities, indices, currencies, cryptocurrencies, or even another derivative product. The purpose of options trading is to hedge the risks on existing positions or for speculation.

Types of Options

There are two basic types of options: call options and put options. Call options allow contract traders to buy the underlying asset, while put options allow the contract owner to sell the underlying asset. A trader would buy a call option with the expectation that it will rise in value in the future. Conversely, a trader buys a put option with the expectation that the price of the underlying asset will decline in the future.
Options are further categorized into American-style and European-style options based on the dates on which the options may be exercised. American-style options allow traders to exercise the rights at any time before and including on the expiration date of the options, whereas European-style options can only be exercised on the expiration date.

Options Contract Specifications

Underlying AssetThe security on which an option contract is based upon
Contract SizeThe size of the options contract refers to the amount of the underlying asset
Strike PriceAlso known as the exercise price. It is the price that traders can buy or sell the underlying asset when the options are exercised
PremiumThe price that traders acquire the options
Expiry DateThe last day that options are valid, which means traders can exercise options on or before that
Exercise StyleThe dates on which the option may be exercised, either American or European options
If you'd like to read more about options, please visit What Are Options Contracts?.
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