Key Takeaways
● Based on the right they provide the holder, options can be classified into call options and put options.
● Based on whether an option can be exercised before the expiration date, there are American options and European options.
Understanding
There are many different types of options and these can be categorized in several ways:
Based on the right they provide the holder, options can be classified into two categories: call options and put options, as known as 'calls' and 'puts'.
Calls are contracts that give the owner the right to buy the underlying asset in the future at an agreed price. On the other hand, the owner of puts has the right to sell the underlying asset in the future at an agreed price.
Options also can be typed by different underlying assets. The most common type is stock options, in which the underlying asset is shares of a publically listed company. In addition, there are index options, ETF options, currency options, futures options, commodity options, basket options, and other types.
Based on whether an option can be exercised before the expiration date, there are two types of options: American options and European options.
American options can be exercised at any time before the expiration date, while European options can only be exercised on the expiration date.
Based on whether they are listed on exchanges, options can be classified into two categories: exchange-traded options and over-the-counter (OTC) options.
Exchange-traded options contracts, also known as 'listed options', are listed on exchanges such as the Chicago Board Options Exchange. OTC options also called 'dealer options' are traded between two private parties, and are not listed on an exchange. An exchange-traded option is a standardized derivative contract, whereas an OTC option may be individually tailored to meet any business need.
