Option

options

In finance, an option is a contract between two parties to buy (call) or sell (put) an asset (typically a stock or bond) at a strike price by a specified expiration date after which the option is worthless and the contact is void. The price of an option derives from the value of an underlying asset plus a premium based on the time remaining until the expiration of the option. Other types of options exist, and options can in principle be created for any type of valuable asset. You would buy the stock (go long) or a call option if you anticipated the price of the underlying security was going to rise before the option reached expiration.

You would buy a put option if thought the price was going to fall, or you can short the stock, selling shares borrowed from a third party with the intention of buying identical assets back at a later date to return to the lender. Options are quoted in per share prices, but only sold in 100 share lots. For example, a call option might be quoted at $2, but you would pay $200 because options are always sold in 100-share lots. Options are identified by the month they expire, and the strike price. For example, an ‘XYZ April25 Call’ would be a call option on XYZ stock with a strike price of 25 that expires in April. All options expire on the third Friday of the month unless that Friday is a holiday, then the options expire on Thursday.

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