option contract


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Option

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.

option contract

A contract granting an option.

References in periodicals archive ?
All over the world underlying assets for which option contracts are offered include single stocks, commodities and renowned market indices.
The regulations approved by the SECP regularise such trading activity and would ensure that trading of standardized index based option contracts now takes place on the Karachi Automated Trading System (KATS).
S~ |is equivalent to~ quantity of good X delivered under the negative option contract.
A number of other strategies could be devised to alter current cost and benefits of option contracts as risk management tools and government support programs.
The graphic presentation of the number of option contracts traded within SMFCEX between 1998 and 2007 is not suggestive to determine the tendency manifested within the market, which imposes multiple variants testing.
There are several conditions that must be met prior to the payment of the remainder of the Purchase Price, the assignment of the Call Option Contracts, and certain other matters contemplated by the Omnibus Agreement.
LBSF then tried to use the bills it acquired to avoid payment of money admittedly owed by LBSF under the foreign currency and interest rate swap and option contracts and was utterly void.
In order for the option contracts to be in the money by expiration, the stock must appreciate approximately six points, or 8.
The plaintiffs contend that the stock option contracts do not contain a provision allowing eBay to cancel previously granted stock options upon the sale of a subsidiary, and that the contract provides that their stock options should have continued to vest as long as they were in "continuous service" with Butterfields.
On the options front, there are now 5,731 open option contracts in the front three month's series, with 1,185 puts versus 4,546 calls.
25 (125 open put option contracts for every 100 open call contracts) in the front three-months' series.