Buying an option gives you the right to buy or sell a specific financial instrument at a specific price, called the strike price, during a preset period of time.
In the United States, you can buy or sell listed options on individual stocks, stock indexes, futures contracts, currencies, and debt securities.
If you buy an option to buy, which is known as a call, you pay a one-time premium that's a fraction of the cost of buying the underlying instrument.
For example, when a particular stock is trading at $75 a share, you might buy a call option giving you the right to buy 100 shares of that stock at a strike price of $80 a share. If the price goes higher than the strike price, you can exercise the option and buy the stock at the strike price, or sell the option, potentially at a net profit.
If the stock price doesn't go higher than the strike price before the option expires, you don't exercise. Your only cost is the money that you paid for the premium.
Similarly, you may buy a put option, which gives you the right to sell the underlying instrument at the strike price. In this case, you may exercise the option or sell it at a potential profit if the market price drops below the strike price.
In contrast, if you sell a put or call option, you collect a premium and must be prepared to deliver (in the case of a call) or purchase (in the case of a put) the underlying instrument. That'll happen if the investor who holds the option decides to exercise it and you're assigned to fulfill the obligation. To neutralize your obligation to fulfill the terms of the contract before an option you sold is exercised, you may choose to buy an offsetting option.
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