An option is a kind of derivative contracts with clear terms and properties. It allows the buyer to buy / sell an underlying asset at a particular date in the future at the established price.
When it comes to option contracts it’s necessary to take into account their main features:
- premium (option price)
- expiration date
- strike price
Options can be divided into 2 types: the call option that establishes the right to buy the underlying asset and the put that implies selling the underlying asset.
Option contracts can be executed by 2 parties of the transaction. The seller writes the option contract, collecting the premium and is obliged to execute it in case the buyer exercises his right. The buyer buys the option contract, paying the premium and can use his right to exercise the contract if desired or can sell it in the market until expiration.
An option is a flexible financial instrument that enables you to manage risks and profit potential by using different options trading strategies.