Options & derivatives
Option
A contract giving the right, but not the obligation, to buy or sell something at a set price by a set date.
How it works
The buyer pays a premium for the right and can walk away. The seller receives the premium and takes on an obligation they cannot walk away from.
That asymmetry is the whole subject. Buyers have limited loss and unlimited or large upside; sellers have limited gain and potentially very large loss.
Related terms
- Call optionThe right to buy an asset at a fixed price before a set date.
- Put optionThe right to sell an asset at a fixed price before a set date.
- Strike priceThe price at which an option holder can buy or sell the underlying asset.
- PremiumThe price paid for an option, made up of intrinsic value plus time value.
- ExpiryThe date after which an option ceases to exist.
Mentioned in
More in Options & derivatives
- Option spread
- Notional value
- Intrinsic value (options)
- Protective put
- In the money
- Implied volatility
- Spread betting
- Futures contract
All 30 Options & derivatives terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.