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 ?
However the scope of the potentially covered transactions is broader under Notice 2015-74 as including any basket contract, not just basket option contracts. Transactions covered under Notice 2015-74 may include notional principal contracts, forwards, or any other derivative, and are not limited exclusively to those structured as options.
[37], and Hsieh and Lu [38], we investigate the coordination of supply chain with a risk-neutral supplier and two risk-averse retailers engaged in promotional competition based on an option contract and a CVaR criterion.
long hedge--an initial purchase of a futures contract or an initial purchase of a call option contract used to protect against an initial forward sell in the cash market.
To execute a transaction an investor can merely call his broker and state, "Please purchase 5 ABC April-60 call option contracts for my account." A written record of the trade automatically will be sent to the buyer or seller of the option contract confirming the transaction.
Thus, an option contract provides an option to purchase (known as a call option) or sell (known as a put option) the underlying asset at a fixed price for a specified period of time.
(TCI) attempted to sell its cable subscribers the Encore channel as a negative option contract. All subscribers were to receive the channel unless TCI was notified otherwise, and all subscribers would pay a monthly charge for the service unless TCI was notified otherwise to discontinue the service.
Option buyers pay the writer or seller of the option a premium for this option contract and their financial risk is limited to the premium paid to the seller.
The New York Stock Exchange (NYSE), part of the Intercontinental Exchange announced it will launch a new equity option contract on the NYSE FANG+ Index - a new product that offers exposure to a select group of highly-traded next generation technology and tech-enabled companies.
Kwon, "Online advertisement service pricing and an option contract," Electronic Commerce Research and Applications, vol.
Eurodollar options volume averaged 1.2m contracts per day, up 29% from September last year and included record average daily volume in the third-year Eurodollar mid-curve option contract. Treasury futures volume averaged 2.9m contracts per day, up 17% compared with September 2013.
An option contract essentially gives its holder a right, but not the obligation to buy or sell an underlying asset on a future date at a predetermined price.