Option

An option is a financial derivative that specifies a contract between two parties that gives the buyer (of the option) the right but not the obligation to buy/sell an underlying asset at a pre-decided price (strike price) on or before a specified date, while the seller (of the option)  is obligated to fulfill the transaction. Option buyers are referred to as holders, while option sellers are called writers.

 

In options, either of the two rights is given to the holder of the option: Right to buy the underlying asset (known as Call option) or Right to sell the underlying asset (i.e. Put option) at the strike price. As the holder has a right, he has to pay an upfront amount to the seller called premium.

 

Based on when the options can be traded until expiration, options can be of two types: American Options and European Options.