CandleFocus Glossary Editor
An option agreement is a contract between a buyer, who is referred to as the holder, and a seller, referred to as the writer, that gives the holder the ability to purchase an asset – most commonly a security or other financial instrument – at an agreed-upon price and within an agreed-upon timeframe. Using options can help buyers limit the amount of risk they take on when making financial investments, as options allow for potential profits and losses to be partially predetermined.
Options can be called or put. A call option gives the holder the right to buy the underlying asset at the agreed-upon price, while a put option gives the holder the right to sell the asset at that same price. In either case, the agreed-upon price is known as the strike price. The fixed timeframe that must pass before the option expires is known as the expiration date. This is the last day that the holder may either buy or sell the asset specified in the option contract.
Options are considered to be a leveraged investment, meaning that potential gains or losses associated with an option investment will be amplified relative to the amount of capital invested in the option. For example, if an investor purchases a call option controlling 100 shares at a strike price of $20, they will only invest what it cost to purchase the option, usually just a few dollars. Conversely, if they were to purchase the same 100 shares without a call option, they would invest the full value of the underlying security, usually equaling a few hundred dollars. As a result, the profits and losses associated with purchasing a call option will generally be greater, when compared to the profits and losses associated with a direct purchase of the underlying security.
In order to gain access to an option contract, the holder must pay a premium for the right to purchase or sell the underlying asset. The premium is the price that the holder pays for the option, and it will remain non-refundable no matter the outcome. The premium can fluctuate depending on market conditions and the demand for the option contract.
Overall, option agreements are used for many different types of investments, from stock indexes and commodities to real estate and physical assets. Investing in options contracts offers buyers the potential to make high returns, while allowing them to limit the risks that come with traditional investments.
Options can be called or put. A call option gives the holder the right to buy the underlying asset at the agreed-upon price, while a put option gives the holder the right to sell the asset at that same price. In either case, the agreed-upon price is known as the strike price. The fixed timeframe that must pass before the option expires is known as the expiration date. This is the last day that the holder may either buy or sell the asset specified in the option contract.
Options are considered to be a leveraged investment, meaning that potential gains or losses associated with an option investment will be amplified relative to the amount of capital invested in the option. For example, if an investor purchases a call option controlling 100 shares at a strike price of $20, they will only invest what it cost to purchase the option, usually just a few dollars. Conversely, if they were to purchase the same 100 shares without a call option, they would invest the full value of the underlying security, usually equaling a few hundred dollars. As a result, the profits and losses associated with purchasing a call option will generally be greater, when compared to the profits and losses associated with a direct purchase of the underlying security.
In order to gain access to an option contract, the holder must pay a premium for the right to purchase or sell the underlying asset. The premium is the price that the holder pays for the option, and it will remain non-refundable no matter the outcome. The premium can fluctuate depending on market conditions and the demand for the option contract.
Overall, option agreements are used for many different types of investments, from stock indexes and commodities to real estate and physical assets. Investing in options contracts offers buyers the potential to make high returns, while allowing them to limit the risks that come with traditional investments.