Option

Definition

An option takes the form of a contract that gives its holder the right but not the obligation to buy or sell a fixed number of shares (or other instrument) at a fixed price on or before a given date.

• A CALL option is an option to BUY shares. Call options generally rise in price if the underlying shares rise in price (and vice versa).
• A PUT option is an option to SELL shares. Put options generally rise in price if the underlying shares fall in price (and vice versa).

Note that the holder has a right, not an obligation. This means that he can decide to exercise the option to buy or sell the shares if he wants, but he doesn't have to if he decides that it is not in his interests to do so. The main criterion for that decision is whether the exercise price of the option is higher or lower than the current price of the underlying share.

Options can exist over a number of different classes of asset including property, chattels, and most types of financial assets. For most people, they relate to ordinary shares, and the options are called equity options. In London they are traded on LIFFE.

See also

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