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What Is An Option?

Views 58302022.02.22

Key takeaways

  • An option is a contract that gives its holder the right to buy or sell an underlying asset at a certain price for a limited period of time. 

  • There are five basic factors of a standard option: the underlying asset, premium, strike price, contract type, and expiration date.

Understanding an Option

An option is a contract that gives its holder the right to buy or sell an underlying asset at a certain price for a limited period of time. There are five basic factors of a standard option contract:

  1. Underlying asset. An Option's price is derived from the underlying asset that it tracks. The underlying asset could be stocks, market indices, exchange-traded funds, bonds, currency, interest rates, or futures contracts.

  2. Premium. An option premium is a price paid by the buyer to the seller for an option contract or the current price of an option contract that has yet to expire.

  3. Strike price. The strike price is the price at which the holder of the option contract may buy or sell the underlying asset. It is also known as the exercise price. 

  4. Contract type. There are two types of options: calls and puts. A call gives the buyer the right to buy the underlying asset at the strike price for a limited period of time. Conversely, puts give the buyer the right to sell the underlying asset at the strike price for a specified period of time. 

  5. Expiration date. This is the date on which the option expires. If an option has not been exercised prior to its expiration, it ceases to exist— that is, the option holder no longer has any rights, and the option no longer has any value. The style of an option refers to when that option is exercisable. The most common styles are the American style and the European style. The American style option may be exercised at any time prior to and including the day of expiration. The European style option is exercisable only on its expiration date.

The content in this article is intended for general circulation and informational purposes only. It does not take into account the investment objectives, financial situation or needs of any particular person and should not be relied on as advice or recommendation. Information provided in this article are not specifically intended for or specially targeted at the public in any specific jurisdiction. Neither Moomoo Inc. nor its affiliates are licensed Financial Advisers and do not provide financial advice. You are advised to consult your financial adviser before making any commitment to invest in any capital markets product. The information published is not and does not constitute or form part of any offer, invitation or solicitation to subscribe or to enter into any transaction in capital markets products. Moomoo is a professional trading app offered by Moomoo Inc. In the U.S., investment products and services on Moomoo are offered by Futu Inc., Member FINRA/SIPC. In Singapore investment products and services are offered through Futu Singapore Pte. Ltd., regulated by the Monetary Authority of Singapore (MAS). This advertisement has not been reviewed by the MAS. Moomoo Inc., Futu Inc. and Futu Singapore Pte. Ltd are affiliated companies. Any illustrations, scenarios, or specific securities referenced herein are strictly for illustrative purposes. Past investment performance does not guarantee future results. Investing involves risk and the potential to lose principal.

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