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What are options contracts?

Curious about derivatives

What are options contracts?

Options contracts are derivative contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price (known as the strike price) on or before a specific date. In exchange for this right, the holder pays a premium to the seller or writer of the option.

There are two types of options: call options and put options. A call option gives the holder the right to buy an underlying asset at the strike price, while a put option gives the holder the right to sell an underlying asset at the strike price.

Options contracts provide flexibility to the buyer in terms of deciding whether to exercise the option or not, based on market conditions. Unlike futures contracts, options contracts do not obligate the holder to buy or sell the underlying asset. The seller of an option contract, however, is obligated to sell or buy the underlying asset at the predetermined price if the buyer decides to exercise the option.

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