Options are financial instruments that provide flexibility in almost any investment situation. Options give you options by providing the ability to tailor your position to your situation.
The following information provides the basic terms and descriptions that investors should know about equity options.
The two types of equity options are calls and puts.
A call option gives its holder the right to buy 100 shares of the underlying security at the strike price, anytime before the option’s expiration date. The writer (or seller) of the option has the obligation to sell the shares.
The opposite of a call option is a put option, which gives its holder the right to sell 100 shares of the underlying security at the strike price, anytime before the option’s expiration date. The writer (or seller) of the option has the obligation to buy the shares.
|Holder (Buyer)||Writer (Seller)|
|Call Option||Right to buy||Obligation to sell|
|Put Option||Right to sell||Obligation to buy|
An option’s price is called the premium. The option holder’s potential loss is limited to the initial premium paid for the contract. Alternately, the writer has unlimited potential loss. This loss is somewhat offset by the initial premium received for the contract. For more information, visit our Options Pricing section.
Investors can use put and call option contracts to take a position in a market using limited capital. The initial investment is limited to the price of the premium.
Investors can also use put and call option contracts to actively hedge against market risk. Investors can purchase a put as insurance to protect a stock holding against an unfavorable market move while maintaining stock ownership.
A call option on an individual stock issue may be sold to provide a limited degree of downside protection in exchange for limited upside potential. Our Strategies Section shows various options positions and explains how options can work in different market scenarios.
The underlying security (such as XYZ Corporation) is the instrument that an option writer must deliver (in the case of call) or purchase (in the case of a put) upon assignment of an exercise notice by an option contract holder.
Most options that expire in a given month usually expire on the third Friday of the month. Therefore, this third Friday is the last trading day for all expiring equity options.
This day is called Expiration Friday. If the third Friday of the month is an exchange holiday, the last trading day is the Thursday immediately preceding this exchange holiday.
Many products now offer short-term options with weekly expirations, so investors should know the exact contract terms, including expiration dates, for all contracts they trade.
After the option’s expiration date, the contract ceases to exist. At that point, the owner of the option who does not exercise the contract has no right and the seller has no obligations as previously conveyed by the contract.
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Content licensed from the Options Industry Council is intended to educate investors about U.S. exchange-listed options issued by The Options Clearing Corporation, and shall not be construed as furnishing investment advice or being a recommendation, solicitation or offer to buy or sell ant option or any other security. Options involve risk and are not suitable for all investors