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In the investing world, an “option” is a type of contract you can buy or sell. Find out the different types of options and how they work.
An option is a contract to buy or sell a security for a specific price, called the strike price, on or before the option’s expiration date. Options are available for individual stocks, stock indexes, commodities and other securities. They trade on stock exchanges and can be bought and sold both through brokers and self-directed investing platforms.
Call options grant their holders the right to buy the underlying investment at the strike price. Put options permit their holders to sell at the strike price. If options are not exercised, they expire worthless on their expiration dates.
Options are referred to as derivative securities because their value is derived from the prices of other securities, the underlying stocks, commodities or other assets.
The option is referred to as “covered” if its seller owns the underlying security and can fulfill the contract without having to buy shares. If the seller doesn’t own the security, the option is referred to as “naked.”
Example: “Amy bought a call option on a particular stock that gave her the right to buy 1,000 shares at $35 per share on or before May 30. The stock price rose to $39 per share, so she exercised the option.”
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