Option - Definition & Types
An option is a contract that is linked to an underlying asset. For example stock or another security. Options contracts are good for a set time period, which could be as short as a day or as long as a couple of years.
A Call Option gives you the right to buy an underlying security at a designated price within a certain time period. The price you pay is called the strike price. The end date for exercising a call option is called the expiry date.
Types of Call options
American-style call options: With American-style options you can buy the underlying asset any time up to the expiry date.
European-style call options: This style option only allows you to buy the asset on the expiry date.
A Put Option is the opposite of a call option. Instead of having the right to buy the underlying security, a Put Option gives you the right to sell it at a set strike price. Put options also have an expiry date.
Types of Put options
American-style put options: With American-style options you can sell the underlying asset any time up to the expiry date.
European-style put options: European-style options only allow you to sell the asset on the expiry date.