Options contract

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Related to Options contract: call option

Options contract

A contract that, in exchange for the option price, gives the option buyer the right, but not the obligation, to buy (or sell) a financial asset at the exercise price from (or to) the option seller within a specified time period, or on a specified date (expiration date).


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 strike price) on or before a certain expiration date, or exercise date. The asset in the contract is referred to as the underlying asset, or simply the underlying. An option giving the buyer the right to buy at a certain price is called a call, while one that gives him/her the right to sell is called a put.

Options contracts are used both in speculative investments, in which the option holder believes he/she can secure a price much higher (or lower) than the fair market value of the underlying on the expiration date. For example, one may purchase a call option to buy corn at a low price, expecting the price of corn to rise significantly by the time the option is exercised. The investors may then buy the corn at the agreed-upon low price and instantly resell it for a tidy profit. Cases in which the option holder is correct are called in the money options, while cases in which the market moves in the opposite direction of the speculation are called out of the money. Like all speculative investing, this is a risky venture.

Other investors use option contracts for a completely different purpose: to hedge against market movements that would cause their other investments to lose money. For example, the same corn investor may buy the commodity at fair market value with the hope of the price rising. He/she may then buy a put contract at a high price in case the price of corn declines. This will limit his/her risk: if the price of corn falls, the investor has the option to sell at a high price, and, if the price of corn rises (especially higher than the strike price of the option), then he/she will choose not to exercise the option. See also: Futures, Forward Sales.
References in periodicals archive ?
Rupee options contracts launched by Indian exchanges have proven to be highly successful, which augurs well for the success of the DGCX Rupee options contract.
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DGCX will hold workshops on the INR Options contract prior to its launch on September 26.
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EU regulated trading platform Daweda Exchange has launched an online marketplace where retail clients can buy and sell binary options contracts directly from each other, the company said.
This is how the trades were executed: In the first leg, through synchronized trades, an investor will sell some put options contracts to another at a price which is totally out of sync with the market.
International Resource News-June 21, 2011--CME Group launches short-term options contracts for Gold, Crude Oil and Natural Gas(C)1994-2011 ENPublishing - http://www.
Within it where established the bases of futures contracts transactions, in the first instance and subsequent options contracts transactions.
In related news, Standard & Poor's and the New York Board of Trade will introduce the S&P Commodity Index (SPCI) and the Fall 2001 launch of futures and options contracts based on the index.