What is an option contract?
A contract giving the holder the right, but not the obligation, to buy (call), or sell (put), a specified underlying asset at a pre-agreed price, at either a fixed point in the future (European-style), or at a time chosen by the holder up to maturity (American-style). Options are available in exchange-traded, and over-the-counter (OTC) markets.Investors in options must be correct on timing as well as on valuation of the underlying asset to be successful.
There are two basic types of options on futures contracts: "calls" and "puts." A call option on futures contracts conveys the right (but not the obligation) to the buyer to purchase a specific futures contract (for example, a syobean contract for a September 1999 delivery month) at a particular price during a specified period of time. A put option conveys the right (but not the obligation) to the buyer to sell a specific futures contract at a given price during a specified period of time. The price for which the futures contract can be brought (in the case of a call option) or sold (in the case of a put option) under the terms of the option contract is referred to as the option's strike price or exercise price. The date on which an option expires--the date after which it can no longer be exercised--is the option's expiration date. The price of a specific option, that is, the amount of money paid by the buyer of an option and received by the seller of any option, is the option premium.
