The 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, it expires. No shares change hands and the money spent to purchase the option is lost. For the buyer, the upside is unlimited. Option contracts, like stocks, are therefore said to have an asymmetrical payoff pattern. For the writer, the potential loss is unlimited unless the contract is covered, meaning that the writer already owns the security underlying the option. Option contracts are most frequently as either leverage or protection. As leverage, options allow the holder to control equity in a limited capacity for a fraction of what the shares would cost. The difference can be invested elsewhere until the option is exercised. As protection, options can guard against price fluctuations in the near term because they provide the right acquire the underlying stock at a fixed price for a limited time. risk is limited to the option premium (except when writing options for a security that is not already owned). However, the costs of trading options (including both commissions and the bid/ask spread) is higher on a percentage basis than trading the underlying stock. In addition, options are very complex and require a great deal of observation and maintenance. also called option.
Related information about option contract:
- Option contract - Wikipedia, the free encyclopedia
An option contract, or simply option, is defined as "a promise which meets the requirements for the formation of a contract and limits the promisor's power to ...
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Definition of option contract: The right, but not the obligation, to buy (for a call option) ... If the option contract is exercised, the writer is responsible for fulfilling the ...
- Options Contract Definition | Investopedia
A contract that allows the holder to buy or sell an underlying security at a given price, known as the strike price. The two most common types of options contracts ...
- Option contract - Financial Dictionary - The Free Dictionary
A contract in which the writer (seller) promises that the contract buyer has the right, but not the obligation, to buy or sell a certain security at a certain price (the ...
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For every buyer of an option contract, there is a seller (also referred to as the writer of the option). In exchange for the cash received upon creating the option, the ...
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An option is a contract to buy or sell a specific financial product officially known as the option's underlying instrument or underlying interest. For equity options ...
- Options Contract Definition & Example | InvestingAnswers
Another type of option contract is an over –the-counter option which is a trade between two private parties. This may include interest rate options, currency ...
- What is option contract? - BusinessDictionary.com
Definition of option contract: a right to buy or sell a specific number of shares at a fixed price.