Option trading

An option is a financial instrument that gives one party the right, but not the obligation, to buy or sell an underlying asset from or to another party at a fixed price over a specific period of time.

1. An option that gives the right to buy is referred to as a call option .
2. An option that gives the right to sell is referred to as a put option.
3. The fixed price which the underlying can be bought or sold is called the exercise price or strike price.
4. The action of buying or selling the underlying at the exercise price is called exercising the option.
5. The holder of the option has the right to exercise it and will do so if the situation is advantagous;
6. Otherwise, the option will expire worthless, unexercised.
7. The price that the option buyer pay to the option seller is called the premium.
8. Option contract can be created between the buyer and seller of an option with their arranged terms.