An option contract is an agreement that grants the buyer, in exchange for the payment of a price (premium), the right (not the obligation) to buy or sell an underlying asset at a price (exercise price or strike) and at a future date, according to the conditions set in advance by both parties.
The option buyer acquires the right to buy or sell the underlying asset. Therefore, when the option expires, it has no obligation. To this end, they must pay the stated premium.
The seller, who guarantees the collection of the premium, does have the obligation to buy or sell the underlying asset under the stipulated conditions.
The premium is the price of the option paid by the buyer and received by the seller in exchange for the right to sell / buy the underlying asset, at the expiration date of the contract, under the agreed conditions.
These are the main types of options:
- Call option: It is an option that grants to its buyer the right to buy the underlying asset at a certain price on the stated expiration date, undertaking the seller, on its part, the obligation to sell under such conditions.
When an investor purchases a call option, their market prospects are bullish, so they expect the value of the underlying asset to be higher than the agreed exercise price, getting a gain on that date. Thus, if at the expiration date of the contract the expectations of the call option buyer are met, they will be interested in exercising the option to the extent that what they are going to pay for the asset (the exercise price) is less than the market price.
- Put option: It is an option that grants its buyer the right to sell the underlying asset at a certain price on the stated expiration date, undertaking the buyer, on its part, the obligation to buy under such conditions.
When an investor purchases a put option, their market outlook is bearish, so they expect the value of the underlying asset to be lower than the agreed exercise price, getting a gain on that date. Thus, if on the expiration date of the contract the expectations of the buyer of the put option are met, they will be interested in exercising the option to the extent that they are going to sell the underlying asset at a price higher than the market price.
