What Is an Option?
An option gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a fixed price (the strike price) on or before a fixed date (expiry). Unlike futures, where both sides are obligated to transact, the options buyer can simply let the contract expire worthless if it doesn't favor them — their maximum loss is limited to what they paid.
CALL vs PUT
- A CALL option gives the buyer the right to buy the underlying at the strike price. Buy a CALL when you expect the price to rise.
- A PUT option gives the buyer the right to sell the underlying at the strike price. Buy a PUT when you expect the price to fall.
Premium
The premium is the price paid by the buyer to the seller (writer) for this right. It has two components: