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Call Option Put Option
Definition:A call option provides the right to buy a specified quantity of a financial instrument at a set "strike price" at some time on or before expiration.A call option provides the right to sell a specified quantity of a financial instrument at a set "strike price" at some time on or before expiration.

Options are financial instruments that convey the right, but not the obligation, to engage in a future transaction on some underlying security. The initial transaction in this context (buying/selling an option) is not the supplying of the underlying instrument (a commodity, stock or other securities/assets). Rather it is the granting of the right to buy the underlying instrument, in exchange for a fee - the option price or premium.

The party that sells the option is called the writer of the option. Upon the option holder's choice to exercise the option, the party who sold, or wrote, the option must fulfill the terms of the contract.

Buying a call option provides the right to buy a specified quantity of a financial instrument (a commodity, shares or other securities) at a set strike price at some time on or before expiration. Conversely, buying a put option provides the right to sell.

The buyer of a call option wants the price of the underlying instrument to rise in the future; the seller either expects that it will not, or is willing to give up some of the upside (profit) from a price rise in return for

  • the premium (paid immediately), plus
  • retaining the opportunity to make a gain up to the strike price (see below for examples).

The buyer of a put option either believes it's likely the price of the underlying asset will fall by the exercise date, or hopes to protect a long position in the asset. The advantage of buying a put over shorting the asset is that the risk is limited to the premium. The put writer does not believe the price of the underlying security is likely to fall. The writer sells the put to collect the premium.

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