Option

Options are financial instruments that derive their value from an underlying security or other asset. Stock options have stocks or shares as their underlying securities.

When you are purchasing or issuing stock options you are making an option agreement with another part. There are always two parts in a option agreement, one part that are issuing the option and another part that buys the option.

When trading with options, you can take four basic positions. You can issue a call option, you can buy a call option, you can issue a put option and you can buy a put option.

When you buy a call option you buy the right, within a certain period of time, to buy equities to a certain strike price. If you buy 1000 call options, then you have the right to buy 1000 shares from the part who issued the call options on or before the date of exercise. Anyone who issues a call option is obligated to sell the shares to the purchaser of the call option at any time prior to and on the date of exercise. The part that issues a call option receives a premium when the call option is purchased, the premium depends on the number of call options purchased and the option price. The buyer of a call option can only lose what he has invested while the issuer of a call option can lose an unlimited amount of money.

When you buy a put option you buy the right, within a certain time period, to sell shares at a specified strike price. If you buy 1000 put options, then you have the right to sell 1000 shares to the part who issued the put option on or before the date of exercise. Anyone who has issued a put option is obligated to buy shares from the person who bought the put option at any time prior to and on the date of exercise. The part who issues a put option receives a premium when the put option is purchased, the premium depends on the number of put options purchased and the option price. The buyer of a put option can only lose what he has invested while the issuer of a put option can lose the difference between the strike price and zero multiplied by the number of options.

Options are most commonly traded on an organized market but two individuals or two companies may sign an option agreement outside of an organized market.