What are Options

An Option is a contract that gives the owner the right but not the obligation to buy or sell an underlying asset or product on or before a specified date at a specified strike price.

Lets try to understand this using an example. If you buy 1 call OPTION contract on a stock- Strike $50 with an expiration date July 2013 for some bid price, you basically have the right to buy 100 shares(1 option contract = 100 shares) of that underlying stock for $50 per share at any time before or on July 2013(expiration date should be listed) regardless of what the stock price is at that time. If the stock price as gone up to $60, your you will still be buying it as $50 per share giving you a profit. This is called "exercising an option" by converting the option into stocks.

Note that you have the "right" but not the "obligation", meaning you don't really have to exercise your right to buy stocks from a call option in the above example. Surprise! Most options are bought and sold just for leveraging purposes. Only a few percentage of trades go into actually exercising the option to buy stocks. So you basically buy a call option and after your option has increased in value due to the underlying stock price rising, you just sell the option to get the profit.

1 options contract = 100 shares




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