The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject. For the employee incentive, see Employee stock option. The strike price may be set by reference to the spot price (market price) of option contracts underlying security or commodity on the day an option is taken out, or it may be fixed at optiob discount or at a premium.
The seller has the contrcats obligation to fuThe right, but not the obligation, to buy (for a call option) or sell (for a put option) a specific amount of a given stock, commodity, currency, index, or debt, at a specified price (the strike price) during a specified period of time. For stock options, the amount is usually 100 shares. Each option contract has a buyer, called the holder, and a seller, known as the writer.
If the option contract is exercised, the writer is responsible for fulfilling the terms of the contract by delivering the shares to the appropriate party. In the case of a security that cannot be delivered such as an index, the contract is settled in cash. For the holder, the potential loss is limited to the price paid to acquire the option. When an option is not exercised, contractw expires. No option contracts change hands and the money spent to purchase the option is lost.
For the buyer, the upside is unlimited. Traders use options to speculate, which is a relatively risky practice, while hedgers use options to reduce the risk of holding an asset. In terms of speculation, option buyers and writers have conflicting views regarAn options contract is an agreement between a buyer and seller that gives the purchaser of the option the right to buy or sell a particular asset at a later contracs at an agreed upon price.
Options contracts are often used in securities, commodities, and real estate transactions. There are several types of options contracts in financial transactions. An exchange traded option, for example, is a standardized contract that is settled through a clearing option contracts and is guaranteed. These exchange traded options cover stock options, commodity options, bond and interest rate options, index options, and futures options. Thus, if you purchase seven call option contracts, you are acquiring the right to purchase 700 shares.For every buyer of an option contract, there is a seller (also referred to as option contracts writer of the option).
In exchange for the cash received upon creating optiln option, the option writer gives up the right to buy or sell the underlying stock to someone else for the duration of the option. For instance, if the owner of a call option exercises his or her right to buy the stock at a.