Option
An option is a contract giving the holder the right, but not the obligation, to buy (call) or sell (put) an asset at a specified price before a certain date.
🎬 Video Explanation
Exam Tip
Call = right to BUY. Put = right to SELL. Buyers have rights; sellers have obligations.
What is an Option?
An option is a derivative contract that gives the buyer the right—but not the obligation—to buy or sell an underlying asset at a predetermined price within a specific time period.
Two Types of Options
| Type | Right Given | Buyer Wants | Seller Wants |
|---|---|---|---|
| Call | Right to BUY | Price to rise | Price to fall/stay |
| Put | Right to SELL | Price to fall | Price to rise/stay |
Key Terms
- Premium - Price paid to buy the option
- Strike Price - Price at which option can be exercised
- Expiration Date - Last day option can be exercised
- Intrinsic Value - Amount option is "in the money"
- Time Value - Premium above intrinsic value
Options Positions
| Position | Action | Outlook | Max Loss | Max Gain |
|---|---|---|---|---|
| Long Call | Buy call | Bullish | Premium | Unlimited |
| Short Call | Sell call | Bearish/Neutral | Unlimited | Premium |
| Long Put | Buy put | Bearish | Premium | Strike - Premium |
| Short Put | Sell put | Bullish/Neutral | Strike - Premium | Premium |
Study This Term In
Related Terms
Call Option
A call option gives the holder the right to buy an underlying asset at a specified strike price before the expiration date.
Put Option
A put option gives the holder the right to sell an underlying asset at a specified strike price before the expiration date.
Premium (Insurance)
An insurance premium is the amount paid by the policyholder to the insurance company for coverage, typically paid monthly, quarterly, or annually.
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