OPTION
An option is a contract that gives the buyer the
right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just
like a stock or bond, is a security.
It is also a binding contract with strictly defined terms and properties.
CALLS AND
PUTS
The two
types of options are calls and puts:
A call gives the holder the right to buy an asset
at a certain price within a specific period of time. Calls are similar to
having a long position on a stock. Buyers of calls hope that the stock will
increase substantially before the option expires.
A put gives the holder the right to sell an
asset at a certain price within a specific period of time. Puts are very
similar to having a short
position on a stock. Buyers of puts hope that
the price of the stock will fall before the option expires.
Participants
in the Options Market
There are four types of participants in options markets depending on the
position they take:
·
Buyers of calls
·
Sellers of calls
·
Buyers of puts
·
Sellers of puts
People
who buy options are called holders and those who sell options are called writers;
furthermore, buyers are said to have long positions, and sellers are said to
have short positions.
