Options
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Join →What Are Options?
An option is a derivative contract that gives its holder a defined right, but not generally an obligation, to buy or sell an underlying asset at a specified strike price under specified conditions before or at expiration, depending on the option style.
Calls and Puts
A call gives the holder the right to buy the underlying. A put gives the holder the right to sell the underlying.
The buyer pays a premium for the option. The seller, or writer, receives the premium but takes on contractual obligations that can create substantial risk depending on the position.
Basic Option Terms
- Underlying: the asset or reference instrument.
- Strike price: the contractual exercise price.
- Expiration: the point after which the option ceases to exist.
- Premium: the price paid for the option.
Options are more complex than straightforward stock positions because their value depends on several variables. Their detailed pricing and risk characteristics are covered later in the curriculum.
Key Terms
Option, derivative, call, put, strike price, expiration, premium, underlying.
Knowledge Check
- What is the fundamental difference between a call and a put?
- What does the option buyer pay?
- Why are options more complex than a simple stock position?