What are Options: Definition
An option is simply a contract that guarantees the right to buy or sell an underlying asset at a specific price before a certain date. An option is another type of security, like a stock or bond. The price the option guarantees its owner is called the strike price. An options contract generally represents 100 underlying shares. The income earned by the seller of an option contract is called the premium.
What are Options: Calls and Puts
There are two types of options: calls and puts. A call gives its owner the right to buy an asset at a certain price before a certain date. A call holder hopes the stock price will increase before the option expires. A put gives its owner the right to sell an asset at a certain price before a certain date. A put holder hopes the stock price will decrease before the option expires.
What are Options: Example
Someone buys an options contract to buy 100 shares of stocks for $80 dollars for $200. The contract expires in 180 days. If the stock price grew to $85 dollars before the 180 days, the options holder would have the right to buy the 100 shares at $80 strike price, essentially saving $500 while paying the option’s seller the $200 premium.