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).

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.
References in periodicals archive ?
Gary Anderson, CEO of Dubai Gold and Commodities Exchange said: The re-listing of the Indian Rupee options contract further widens opportunities to trade Emerging Market contracts on the Exchange.
Gary Anderson, CEO of Dubai Gold and Commodities Exchange said, "The re-listing of the Indian Rupee options contract further widens opportunities to trade Emerging Market contracts on the Exchange.
For example, AAPL7 and SPY7 will differentiate them from regular-sized options contracts while AAPL8 and SPY8 will identify corporate actions on the underlying stock.
DGCX will hold workshops on the rupee options contract prior to its launch on September 26.
NYSE: NMX), today announced that it will introduce the first slate of futures and options contracts as part of its Green Exchange initiative on March 16 for trade date March 17.
Encouraging producers to use hedging instruments like options contracts is one such alternative.
The launch of the Options contract will build on the success of the DGCX Indian Rupee Futures contract, which on September 22, recorded its highest ever daily volume of 34,046 contracts, valued at $1.
DGCX will hold workshops on the INR Options contract prior to its launch on September 26.
The new average price options contracts and their commodity codes will be: heating oil crack spread (3W), RBOB crack spread (3Y), and gasoil crack spread (3U).
The tutorial also presents circumstances where it is profitable to exercise an options contract.
With convenience and value a priority for its clients, Ameritrade Holding Corporation (Nasdaq:AMTD) today announced enhancements to its options trading platform while also lowering its options contract pricing from $1.