Options - Definition

An option is a contract between two parties – a buyer (holder) and a seller (writer)- that gives the right to the buyer (holder), but not the obligation, to purchase or sell something at a later date, at a price agreed upon today.

The option buyer pays the seller a sum called price or premium.

The option seller stands ready to sell or to buy according to the contract term, if and when the buyer desires.

An option is a financial instrument which gives the holder of the option the right to do something, but the holder does not have to exercise this right.

By the right given to the holder (buyer)

Call options – gives the holder of the option the right to buy an asset at a certain date for a certain price.

Put options - gives the holder of the option the right to sell an asset at a certain date for a certain price.

By the moment when the holder can exercise his right:

European option – the option can be exercise only at the expiration date.

American option - the option can be exercise at anytime up to the expiration date.

By the possibility to negotiate the option:

Simple – this can not be sold by the holder (OTC options)

negotiable – this are traded on exchange and the holder can sell it on the market.

By the underlying asset

Stock options

Foreign currency options – most are traded on OTC

Index options – most are European type

Futures options – normally matures just before the delivery period in the futures contract.