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The Bottom Line An option is a financial instrument whose value is derived from an underlying asset. All options contracts give the holders the right, but not the obligation, to buy or sell in the case of a put the underlying - but what exactly does that mean? Here, we take a closer look.
Key Takeaways Call options contracts give holders the right, but not the obligation, to buy some underlying security at a pre-determined price by a set expiration time.
Unlike futures or forwards, this means that the call holder can decide whether or not to exercise that right and purchase the asset for that strike price.
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Otherwise, they can let the contract expire worthless. If the option is exercised, however, the option writer seller will be obligated to deliver the underlying to the long at that price. It is the the option right is paid for the rights provided by the call option.
If at expiration, the underlying asset is below the strike price, the call buyer loses the premium paid - they are under no obligation to buy the stock for more than the option right is market price is currently valuing the shares. If, however, it is above the strike price, the buyer can purchase the shares below market value and make a nice profit.
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Thus, unlike other derivatives such as futures and forwards contracts, options contracts give the trading strategies in binary options just that - the option - the make good on the contract. The buyer of an option is therefore not obligated to buy the stock at the strike price.
What About the Writer of the Call Option?
What are the uses of options? How does an option work?
On the other hand, a writeror seller, of a call option would be obligated to sell the underlying asset at a predetermined price if that call option is exercised by the long. This is known as the call writer being assigned.
The writer of a call option is paid to take on the risk that is associated with being obligated to option school shares. The investor hopes that the call will expire worthless.
As a result, many holders of the call options exercise their options to buy. When Derivatives Are Obligations Unlike options, futures and forwards contracts are legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future.
If held at contract expiration, the underlying security must be delivered if short, or delivery must be taken if long. The buyer of a futures or forward contract is taking on the obligation to buy and receive the underlying asset when the futures contract expires.
The seller of the contract is taking on the obligation to provide and deliver the underlying asset at the expiration date. Forwards are more customizable, but trade over-the-counte r OTC between counterparties.
The Bottom Line Call options give the holder of the contract the right to buy the underlying at a pre-specified price. At or before expiration, if the underlying asset rises above that strike price, the holder can exercise the option, obligating the seller of the option to deliver those shares at that price.
The strike price may be set by reference to the spot price market price of the underlying security or commodity on the day an option is taken out, or it may be fixed at a discount or at a premium.
If, however, the price fails to rise above the strike, the call holder can simply let his right expire without exercising it, and only lose the premium paid for the otion. Compare Accounts.
An option is an offer that binds the optionor to sell, but does not obligate the optionee to purchase. Right of First Refusal A right of first refusal obligates a real property owner to offer their property to the holder of the Right of First Refusal upon the same terms as the owner is trying to sell the property to another party. By choosing a right of first refusal versus an option, the owner of the property has more control over the sale of their property, whereas with an option the holder can force the sale at will. With a Right of First Refusal, the holder must wait until the owner decides to sell the property.