Options

What is an option?

An option is a contract to buy or sell a specific financial product officially known as the option's underlying instrument, underlying interest, or underlying security. For equity options, the underlying instrument is a stock, exchange-traded fund (ETF), or similar securities. Option trading is for advanced investors because of its complexity. Options have interesting uses in a portfolio, see uses of options.

Terms associated with options

Options are highly regulated. The option contract establishes a specific price, called the strike price, at which the option contract may be exercised. An option also has an expiration date. When an option expires, it no longer has value and no longer exists. See Options Glossary and Value of Options Glossary.

Basic types of options

Options come in two varieties, call options and put options, and you can buy or sell either type of options. If you are in the Unites States, you will only hear the term options, not American options or European options. However, in Europe and in the United Kingdom, options are specified as either American style options or European style options. The two types of options are slightly different.

Owners of American style options have the right to exercise an option on any day on or before the option's expiration date. Daily exercises refer to those exercising the option before the expiration date. For equity options, exercising a call results in a buy of the underlying security and exercising a put results in a sell. In the case of an index option, an exercise always results in a sell transaction since index options are always cash settled. See also Option Assignments.