Options contracts are a type of derivative security that give an individual the right, but not the obligation, to buy or sell an underlying asset at a predetermined price and time. These assets can be anything from stocks, commodities to currencies. When it comes to options contracts, a trader can either purchase a call option or a put option.
Call Option
A call option is a contract that gives an individual the right to buy an underlying asset at a predetermined price within the expiration date of the contract. If the price of the underlying asset rises above the predetermined price, the trader can exercise the option and buy the asset at the lower price. This means that the trader can make a profit by selling the asset at the current market price.
Put Option
On the other hand, a put option gives an individual the right but not the obligation to sell an underlying asset at a predetermined price within the expiration date of the contract. If the price of the underlying asset falls below the predetermined price, the trader can exercise the option and sell the asset at the higher price. This means the trader can make a profit by buying the asset at the current market price and selling it at the predetermined price.
Options contracts also have two other important features: the strike price and the expiration date. The strike price is the price at which the underlying asset can be bought or sold. The expiration date is the date by which the option must be exercised.
Options contracts can be purchased on an exchange or over-the-counter (OTC). Exchanges are regulated by the Securities and Exchange Commission (SEC), while OTC markets are not. It is important to understand the risks involved in trading options. There is a risk of losing the entire investment, and options trading requires a deep understanding of the market and its trends.
In conclusion, options contracts provide investors with an opportunity to profit from fluctuations in the market. However, it is important to understand the risks involved and to have a deep knowledge of the market trends before investing in options contracts.