This is a contract permitting the owner to buy (call option) or sell (put option) a financial asset at a specified price (strike price). The owner has a specific date or a specified amount of time to choose whether or not to exercise the option.  Options can be used to speculate, which gives more risk, or they can also be used to hedge risk. A person buying a call option would assume that the price of the stock will rise relative to the strike price, generating a profit for the owner. American options can be exercised within a certain period of time whereas European options have a specific date that the option must be exercised on.

« Back to Glossary Index