Options

An option is a contract that gives the holder the right, but not the obligation to either buy or sell an asset or commodity for a certain price on or before a given expiry date. If they Exercise their right, the option seller or Writer is obligated to fulfil the agreement by either supplying the asset or buying it from the option holder. Option sellers charge buyers a fee known as the Premium. If the holder does not Exercise their rights, the option expires worthless and the writer keeps the Premium they collected from the buyer.

The right to buy an asset is known as a Call Option. The right to sell is referred to as a Put Option. The price at which the contract will be exercised is called the Strike Price. Options which are what is called American Style can be exercised at any time before expiry by the holder. In contrast, European Style options can only be exercised on the expiry date.

Traded options are typically offered for an Underlying security or commodity, for example, an index of stocks. They are referred to as Derivatives because the price and characteristics are derived from the Underlying instrument and any changes which impact that will have a corresponding effect on the option. Options are usually denominated in multipliers of the Underlying asset, typically 100 or 1000 units, but the actual figure can vary between instrument contracts and is also affected by changes to the Underlying (for example, stock splits).