option contract

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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 ?
i) With and without option contracts, what is the structure of the optimal ordering policy for the retailer in each period under inflation?
Further indicative of a distinction between a requirements contract and a buyer's option contract, the court noted that the official comments to section 2-306 provide that "a shut-down by a requirements buyer for lack of orders might be permissible where a shut-down merely to curtail losses would not.
put--an option contract that the buyer has the right but not the obligation to have a sell position on the underlying contract.
In a two good world this paper begins with a model of consumer equilibrium behavior when sales of good X are made through a negative option contract.
While agricultural producers and other holders of inventories would generally hedge with the purchase of put option contracts in order to protect against price declines, a variety of more complex hedging strategies are possible with the options instrument.
ISLAMABAD -- The Securities and Exchange Commission of Pakistan (SECP) has approved the Regulations Governing Index Option Contracts of the Karachi Stock Exchange (KSE).
25 by July, management can exercise the option contract and purchase the grain bushels at $3 each.
As a result of the award of contracts will be signed the agreement, which will be the subject of legal advice relating to legal representation in relation to the risks associated with the termination / option contract with the general contractor for the Opole Power Plant.
It has entered into the Option contract with AfGen and Afgas, a substantial shareholder of the Company, to purchase the entire issued share capital of AfGen, said by Gasol.