Options Contracts- What are They?Options contracts refer to the agreement between sellers and buyers. It states that the latter is permitted to buy/sell underlying assets during a specific time (maturity date) and at a certain rate (exercise price/strike price). Here, the seller is obligated to allow the transaction. Options contracts can be on a variety of underlying assets. Being derived from the financial indexes, these contracts can include stocks and cryptocurrencies. These help in trading with speculations. Typically, buyers trade with the following types of assets using this deal:
- Real estate
Types of Options ContractsTwo variations are available in the context of options contract- calls and puts. One can sell them for income generation or buy them to speculate on hedge exposure direction.
Call Options contractWhen the buyer acquires a contract or contracts during the sale, one position opens up in this type of transaction. The former provides a premium to the sellers for guaranteeing the sale of shares at a specific strike price. The position gets the term “covered call” if the seller decides to hold the for-sale shares.
Put Options ContractThose who decide to buy put options speculate that the price declines noticeably for underlying assets (index/stock). Besides that, they sell the available shares as per contract-specified rates. In case the strike price is higher than the share price during or before the expiration date, buyers can sell their contract (no shares in the portfolio). Alternatively, the buyers can decide to assign specific shares for purchase to the seller at the strike rate.
How do Options Contracts Operate?The following terms are included in options contracts:
- Underlying assets
- The expiration or maturity date of the contract
- The strike price, i.e., the specified amount one can trade the underlying asset with