Options are derivatives, or contracts, where two parties agree to buy/sell each other an asset at a specific price (known as the āstrike priceā) at a specific date, just like futures, except that the buyer has the choice of exercising the purchase opportunity, hence the name āoptionā. The seller however is obligated to sell if the buyer chooses to buy.
The buyer pays a premium for the right to buy at the strike price, locking in the opportunity to decide to buy it at that price in the future.
- Call options, or just ācallsā, let the buyer buy the asset at the strike price in a specific timeframe.
- Put options, or just āputsā, let the buyer sell the asset at the strike price in a specific timeframe.