Option

In finance options are types of derivative contracts, including call options and put options, where the future payoffs to the buyer and seller of the contract are determined by the price of another security, such as a common stock. More specifically, a call option is an agreement in which the buyer has the right (but not the obligation) to exercise by buying an asset at a set price strike price on (for a European style option) or not later than (for an American style option) expiration date; and the seller (writer) has the obligation to honor the terms of the contract. A put option is an agreement in which the buyer has the right (but not the obligation) to exercise by selling an asset at the strike price on or before expiration date; and the seller has the obligation to honor the terms of the contract.

Since the option gives the buyer a right and the writer an obligation, the buyer pays the option premium to the writer. The buyer is considered to have a long position, and the seller a short position. For every open contract there is a buyer and a seller. Traders in exchange-traded options do not usually interact directly, but through a clearing house such as, in the U.S., the Options Clearing Corporation (OCC) or in Germany and Luxemburg Clearstream International. The clearing house guarantees that an assigned writer will fulfill his obligation if the option is exercised. Options/Derivatives are not rated and/or are below investment grade; however the OCC's clearing process is considered AAA rated.

The price of an option is called the premium. An option's premium is determined by a few factors including the current price of the underlying asset, the strike price of the option, the time remaining until expiration, and volatility. An option premium is priced on a per share basis. Each option on a stock (1 contract) corresponds to 100 shares. Therefore, if the premium of an option is priced at 1, the total premium for that option would be $100. Buying an option creates a debit in the amount of the premium to the buyer's trading account. Selling an option creates a credit in the amount of the premium to the seller's trading account

A stock option expires by close of business on the 3rd Friday of the expiration month. All listed options have options available for the current month and the next month as well as specific future months. Each stock has a corresponding cycle of months that they offer options in. There are three fixed expiration cycles available. Each cycle has a four-month interval: 1. January, April, July and October; 2. February, May, August and November; 3. March, June, September and December

There are no margin requirements if you want to purchase an option because your risk is limited to the price of the option. In contrast, option sellers receive a credit in their account for selling an option and earn this amount if the option expires worthless. However, option sellers also have an obligation to buy (put) or sell (call) the underlying instrument if their option is exercised by an assigned option holder. Therefore, selling an option requires a healthy margin.