An option is defined as a derivative contract in which a holder has the ultimate right to buy or sell a specific asset by a deadline that they are given. This is not, by any means, an actual obligation. The two main forms of options are calls and puts. A call is when an investor buys an asset when they believe that the value will increase, while a put is when an investor buys an option when they believe that the asset value will decrease.
Key Takeaways:
- An option is a type of derivative contract that gives the right but not the obligation to the holder to buy an asset at a certain date.
- The difference between US options and European options is that the US options can be exercised before the expiration date but the European only on the expiration date.
- Calls are bought by investors when they believe the price of the underlying asset will increase and when they believe it will decrease, they sell it.
“The writer (seller) of the put option is obligated to buy the asset if the buyer exercises their option at the strike price Investors buy puts when they believe the price of the underlying asset will decrease and sell puts if they believe it will increase.”
Read more: https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/options-calls-and-puts/
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