An option is a derivative or finan💜cial contract that gives the holder the right (but not the obligation) to purchase or sell an underlying asset at an agreed-upon price by a specified date in the future, which is known 🌊as the expiration date.

Assets can include stocks, bonds, currencies, indexes, interest rates, and commodities. Options contracts commonly represent 100 units or shares of the underly💦ing asset.

Options are fairly versati𓆉le and require the buyer to pay a premium for the rights outlined in the contract. The rights depend on the type of option an investor holds.

For instance, the holder of a 澳洲幸运5开奖号码历史查询:call option has the right to buy the underlying asset at the agreed-upon price by the expiry date. A 澳洲幸运5开奖号码历史查询:put option, on the other hand, give𒉰s the holder the right to sell the asset at the price by the expiry date.

Options are traded for many reasons. For instance, speculators use them to keep a leveraged position in the underlying security or asset at a cost that's lower than actually buying shares. The use of options has thus increased dramatically to help profit from or hedge against the volatile movements of stock prices.

How Exercising Options Works

澳洲幸运5开奖号码历史查询:Exercising an option simply means purchasing or selling the underlying asset named at the p♊rice agreed upon in the contract. This strike price is used to execute the transaction regardless of the asset's market price at the time the option expires. Remember, option holders have the right to exercise their options, but are not obligated to do so.

There's typically a procedure to follow when an investor wants to exercise an options contract. An investor must inform their brokerage company that they wish to exercise their options contract. The firm sends a notice to the 澳洲幸运5开奖号码历史查询:Options Clearing Corporation (OCC).

The organization chooses a random 澳洲幸运5开奖号码历史查询:clearinghouse, to which it sends the notice. The firm is responsible for allocating the option to a client. The customer must have written that option but must not have covered it.

Exercising an Option on the Expiry Date

There are two types of options: American and European options contracts. American options can be exercised at any time up to and including the expiration date of the option. However, European options can only be exercised on the date of expiration.

Because 澳洲幸运5开奖号码历史查询:expiration dates are usually identified just by a month, a specific date is identified within the expiration month that is used as an exact deadline. For both types of options, this deadline is the third Friday of the expiration month. An investor normally has until 4:30 p.m. CT on the third Friday of the month to instruct their broker to exercise an option. 

Options can expire either 澳洲幸运5开奖号码历史查询:in the money (ITM) or 澳洲幸运5开奖号码历史查询:out of the money (OTM). Those that are in the money can be exercised while OTM options end up becoming worthless. A call option is in the money when the 澳洲幸运5开奖号码历史查询:strike price is lower than the underlying asset's price. A put option is in the money when the underlying asset's price is lower than the strike price. The 💝opposite is true for out-of-the-🍰money options for calls and puts.

The Bottom Line

Options are derivative contracts that give holders the option (but not the obligatio𒁃n) to buy and sell assets a🐼t set prices within a specific time frame, used for hedging or speculative purposes. Options need to be exercised to be used but come with expiration dates.

Exercise rules depend on the type of option. American options have more flexibili🐟ty and can be exercised at any time up to and including the expiration date, while European options can only be exercised on their expiry date.