Risk glossary

 

Call option

The buyer of a call option pays a single premium to the seller (also known as the writer) at purchase. In return, the buyer has the right, but not the obligation, to buy the underlying asset from the option writer for a specified price (the strike price) at a specified time in the future (the maturity or expiration date).

The buyer of a put option may use it to protect against rises in the price of the underlying asset; if the asset’s market price rises above the strike price, the buyer can exercise the option and force the writer to sell the asset at the strike price.

Call options with a strike price above the current market price of the underlying are “out of the money”, because exercising them would lead to a loss for the buyer; if the current market price rises above the strike price, the option is “in the money”.

Options may be settled by the delivery of the actual underlying asset, known as physical settlement, or by a payment equal to the difference between the strike price and the underlying price, known as cash settlement.

See also Put option, American-style option, European-style option, Bermudan option.

Click here for articles on options.

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