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Right, but not the obligation

An option is a financial contract between two parties – option writer (seller of the contract) and option holder (buyer of the contract). Holder receives a right to buy (call) or sell (put) a specified financial asset at a predetermined price (strike price) during a period of contract validity or on a specific date (exercise date).

Note, that the holder is not obligated to buy or sell, he merely has an option to do so before the exercise date. If he doesn’t, he loses the premium paid for the contract to the writer.

If you’re holding a call option, you’re betting that the price of underlying asset will move above the strike price, hence letting you acquire it cheaper (according to contract) and sell at open market at once locking in profits. In this case, option writer must provide the underlying asset for you to buy at the lower-then-market price.

Conversely, if you’re holding put option, you’re bearish on the price of the underlying asset and expect its price to move lower then the strike price. If that happens, you can buy the asset at open the market at a lower price and immediately sell it to the option writer at the strike price of the put option, because of the bounding by contractual agreement to buy it from you.

Fundamentally, the writer and the holder of option contract are betting against each other and have different opinions regarding the market.


You buy a one-month call option on ABC stock with the strike price of $105 and the current market price of $100. If within the month the shares of ABC will rise above the strike price, you will have an option buy it at $105, sell it at the open market right after, and lock in profits. If ABC shares do not close above the strike price before exercise date, you will lose the premium paid for the contract. In reality, the open market buying and selling to lock profits do not have to occur, and profit/loss difference can be settled in cash directly between writer and holder.

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