Options Markets

Function

Prediction market

Core Mechanism

Contract giving the right, but not obligation, to buy or sell an underlying asset

Trading Venues

Regulated options exchanges, Over-the-counter (OTC) transactions

Exercise Styles

American-style (exercisable anytime before expiration), European-style (exercisable only on expiration date)

Value Derivation

From an underlying asset (e.g., stock, ETF, index)

Key Contract Terms

Underlying asset, strike price, expiration date, premium

Main Types of Contracts

Call options (right to buy), Put options (right to sell)

Type of Financial Instrument

Derivative

An option holder may on-sell the option to a third party in a secondary market, in either an over-the-counter "Over-the-counter (finance)") transaction or on an options exchange "Exchange (organized market)"), depending on the option. The market price of an American-style option normally closely follows that of the underlying stock being the difference between the market price of the stock and the strike price of the option. The actual market price of the option may vary depending on a number [...] The most common way to trade options is via standardized options contracts listed by various futures and options exchanges. Listings and prices are tracked and can be looked up by ticker symbol. By publishing continuous, live markets for option prices, an exchange enables independent parties to engage in price discovery and execute transactions. As an intermediary to both sides of the transaction, the benefits the exchange provides to the transaction include: [...] Today, many options are created in a standardized form and traded through clearing houses on regulated options exchanges "Exchange (organized market)"). In contrast, other over-the-counter "Over-the-counter (finance)") options are written as bilateral, customized contracts between a single buyer and seller, one or both of which may be a dealer or market-maker. Options are part of a larger class of financial instruments known as derivative products, or simply, derivatives.

Options trading is a way to get involved in the stock market that's a little different from trading or investing in assets (like stocks or ETFs) directly. If you're considering buying and selling options, here's what you should know. ### What are options? [...] An option is a legal contract that gives you the right to buy or sell an asset (think: a stock or ETF) at a specific price by a specific time. They are known in the financial world as "derivatives." They derive their value from the stock or ETF that the contract refers to. ### How do options work? [...] There are 2 main types of basic options contracts: calls and puts. The difference is what each one allows you or another party to do. Call options provide the right of the option buyer to buy the underlying asset and obligates the option seller to sell the underlying asset at a specific price (determined by the strike price) by the expiration date. Put options provide the right of the option buyer to sell the underlying asset and require the option seller to buy the underlying asset at a

Investors can benefit from downward price movements by either selling calls or buying puts. The upside to the writer of a call is limited to the option premium. The buyer of a put faces a potentially unlimited upside but with a limited downside, equal to the option’s price. If the market price of the underlying security falls, the put buyer profits to the extent the market price declines below the option strike price. If the investor’s hunch is wrong and prices don’t fall, the investor only [...] An option is a derivative, a contract that gives the buyer the right, but not the obligation, to buy or sell the underlying asset by a certain date (expiration date) at a specified price (strike price). There are two types of options: calls and puts. American-style options can be exercised at any time prior to their expiration. European-style options can only be exercised on the expiration date. Image 7: Options: Calls and Puts - Image of call and put arrows over a stock chart [...] If an investor believes the price of a security is likely to rise, they can buy calls or sell puts to benefit from such a price rise. In buying call options, the investor’s total risk is limited to the premium paid for the option. Their potential profit is, theoretically, unlimited. It is determined by how far the market price exceeds the option strike price and how many options the investor holds.

Options are available on numerous financial products, including equities, indices, and ETFs. Options are called "derivatives" because the value of the option is "derived" from the underlying asset. Owning an option, in and of itself, does not impart ownership in the underlying security, nor does it entitle the holder to any dividend payments. Learn about the fundamentals of options contracts. ## Why trade options? [...] Whether you're bullish, bearish, or neutral with equities trading, you are limited to buying and selling. Incorporating options into your trading strategy gives you the ability to implement additional strategies such as: [...] Introduction to Options | Charles Schwab Skip to main navigation Skip to content # Introduction to options ## What are options? An option is a contract that represents the right to buy or sell a financial product at an agreed-upon price for a specific period of time. You can typically buy and sell an options contract at any time before expiration.