An option is a financial instrument that offers the holder the right – but not the obligation – to buy or sell an asset at a set price within a set time period.
How do options work?
There are two types of options:
- Calls, which give the holder the option to buy an asset at the strike price before the expiry date
- Puts, which give the holder the option to sell an asset at the strike price before the expiry date
What is the holder?
Options are a contract between two market participants: the writer and the holder. The writer is the option provider, and the holder is the person who has the right to buy or sell the asset. In return for that right, the holder pays the writer a premium.
What is the strike price?
The strike price is the price at which the holder can buy or sell the asset, set out in the contract from the outset.