Call and put option are the most recognizable forms of option contracts. It gives right/obligation to an individual intending to sell or buy underliers or underlying assets as per the strike price or the exercise price of the option existing in the market. The write up below unveils certain facts about the same.
Options At A Glance:
An option may be called a contract or a provisional contract, which takes place between the option writer and the option holder. In case of the option holder, he gets the “right but not the obligation” to carry out a transaction with the option issuer or option writer as per terms specified in the contract.
Options are known as derivative instruments because their value depends on value of some other derivative instrument. In other words, the value of the option is determined by the value of another financial instrument.
There are two recognizable forms of options. They may be referred to as:
The option holder is given the right to buy an underlying asset at a price, which is specified. The specified price is usually referred to as a strike price.
Exercise Price Or The Strike Price:
The obligation or the right to sell as well as buy underliers or underlying assets is done at a price, which is fixed from before or “predetermined”. This predetermined price is referred to as the strike price or the “exercise price” of option. The strike price is connected to the cost of the underlying assets prevailing in the market.
The option holder is given the right to sell an underlying asset at a strike price (the specified price). Options may be exercised until a particular date. The last date is known as the expiration date. One of the two exercises may be allowed by an option.
Call and put option may be exercised within the expiration date, on any day but should not surpass the expiration date.
In case of European exercise, the expiration date is the only date when the call and put option may be exercised.
Note: It may be mentioned here that any geographical region does not define the exercise forms and the names do not denote option practices pertaining to the areas specified by the names.
Features Of A Call And Put Option:
Whenever a call option is bought on a stock, it indicates that the individual has the right to purchase the stock. Whenever a put option is bought on a stock, it indicates that the individual has the right to dispose off the stock.