Options contract, What is an options contract?
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What is an options contract? In this article, Dr Hong Bo outlines what are options, and explains how they offer flexibility to investors.
In financial terms an options contract is another type of financial derivative. Similar to a futures contract, an options contract can be used for the purposes of both hedging and speculating.
What is an options contract? Options contracts are popular derivative products that are used to speculate on markets and hedge against risk.
However there are also some important differences. As the investor in a futures contract, you have to options contract a position long or short that is opposite to your initial position in the futures market, in order to close the futures contract before or on the expiration date.
Hence an options contract offers more flexibility to the investor.
An options contract gives you the right but not the obligation to buy or to sell the underlying asset at the agreed price before or on the expiration date. If it gives you the right to buy, then it is known as a call option; if it gives you the right to sell something in the future, it is called a put option.
The options market Similar to a futures quasar options system, there is a market for options contracts.
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- The strike price may be set by reference to the spot price market price of the underlying security or commodity on the day an option is taken out, or it may be fixed at a discount or at a premium.
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Generally options contract, if you buy stocks, you will want to sell them sometime in the future, so you need to buy at a lower price and sell at a higher price in order to make a profit. To protect yourself from any possible losses caused by unfavourable changes in prices, you can buy a put option, which gives you the right to sell stocks at a price you are happy with before or on the expiration date.
By doing so you make a profit and the person who sold you the option makes a loss. In this case, you can just throw this piece of paper the put option in the bin and sell your shares directly to the market. Because of the flexibility an options contract provides, you need to pay the seller of the options contract when you buy it.
In other words, an options contract has a price on it at the beginning of the transaction. Apart from call options versus put options, there is also a distinction between the types of options you can buy, namely European options and American options.
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