Types of Options

There are two main types of options contracts: call options and put options.

Call Options:

1. Gives the buyer the right, but not the obligation, to purchase an underlying asset at a predetermined price, known as the strike price, within a specific time frame.
2. If the price of the underlying asset rises above the strike price, the buyer can exercise their option and purchase the asset at the lower strike price, potentially realizing a profit.
3. Typically used by investors who believe that the price of the underlying asset will increase in the future, as they provide a way to gain exposure to potential price increases while limiting potential losses.

Put Options:

1. Gives the buyer the right, but not the obligation, to sell an underlying asset at a predetermined price, within a specific time frame.
2. If the price of the underlying asset falls below the strike price, the buyer can exercise their option and sell the asset at the higher strike price, potentially realizing a profit.
3. Typically used by investors who believe that the price of the underlying asset will decrease in the future, as they provide a way to profit from potential price decreases while limiting potential losses.