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).
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
References in periodicals archive ?
"Our unique new Indian rupee options contracts will provide our members with more flexibility to hedge risk and trade in the Indian rupee in a transparent, regulated and cleared trading environment," said Hasham.
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We are particularly pleased by the initial response to our re-introduced Indian rupee options contract, which will complement the DGCX's successful Indian product offering.
The new options contract is the result of this interaction and feedback process.
We are particularly pleased by the initial response to our re-introduced Indian Rupee Options contract which will complement DGCX's successful Indian product offering.
DGCX's new advanced trading infrastructure, built in partnership with leading global financial technology provider Cinnober, will support heightened trading in the options contract. The new EOS platform provides the Exchange the ability to support high volumes in innovative products such as Indian Rupee options.
DGCX's new advanced trading infrastructure, built in partnership with global financial technology provider Cinnober, will support trading in the options contract. The new EOS platform provides the Exchange the ability to support high volumes in products such as Indian Rupee options.
JRG International became the first company in the world to execute the first trade in the Indian Rupee Options Contract outside India through DGCX.
In July, DGCX announced the launch of the INR Options Contract on 26 September 2011.