How do options work?
To start interacting with options, one should first choose between the following basics characteristics of an option contract:
  • Type of right: put (right to sell) or call (right to buy)
  • Type of exercising: American or European
  • Type of settlement: cash or physical
Once that is decided, one should pay attention to the following details:
  • Underlying asset
  • Strike price
  • Strike asset
  • Expiration date
  • Premium
The underlying asset is the object asset. The asset people want to have to right to either buy or sell in the future.
The strike price is like the trigger price. It's the price that informs both counterparts that the agreement can be exercised.
The strike asset is the asset that will be delivered in return to the underlying asset upon expiry.
The expiration date informs for how long this contract is valid.
The premium is the current market price of an option contract. It is the income or reward that the option seller gains to write and sell the contract. And thus, the option buyer pays to the seller so that it can hold the contract until expiry. The premium is paid upfront.
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