Options Defined

Options are contracts through which a seller gives a buyer the right, but not the obligation, to buy or sell a specified number of shares at a predetermined price within a set time period.

Options are derivatives, which means their value is derived from the value of an underlying investment. Most frequently the underlying investment on which an option is based is the equity shares in a publicly listed company. Other underlying investments on which options can be based include stock indexes, Exchange Traded Funds (ETFs), government securities, foreign currencies or commodities like agricultural or industrial products. Stock options contracts are for 100 shares of the underlying stock - an exception would be when there are adjustments for stock splits or mergers.

Options are traded on securities marketplaces among institutional investors, individual investors, and professional traders and trades can be for one contract or for many. Fractional contracts are not traded.

An option contract is defined by the following elements: type (Put or Call), underlying security, unit of trade (number of shares), strike price and expiration date.

All option contracts that are of the same type and style and cover the same underlying security are referred to as a class of options. All options of the same class that also have the same unit of trade at the same strike price and expiration date are referred to as an option series.

Next: Option Types: Calls & Puts

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