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An option is a contract which gives the buyer (holder) the right, but not the obligation, to buy or sell specified quantity of the underlying assets (such as a commodity, currency, or security), at a specific (strike) price on or before a specified time (expiration date). Unlike futures, the purchaser of an option is not obliged to buy or sell at the exercise price and will only do so if it is profitable; if the option is allowed to lapse, the purchaser loses only the initial purchase price of the option (the option money).
The strike or exercise price of an option is the specified/ pre-determined price of the underlying asset, at which the same can be bought or sold if the option buyer exercises his right to buy/sell on or before the expiration day. The price paid by the buyer to the seller to acquire the right to buy or sell is known as a premium.
The one who is obligated to buy (in case of a put option) or sell (in case of a call option) the underlying asset in case the buyer of the option decides to exercise his option is known as the option seller/writer. His profits are limited to the premium received from the buyer, while his downside is unlimited. The premium fluctuates in response to the current market value of the security/ exercise price, time period between the strike and the expiration date, and supply and demand in the market. The one who buys an option, which can be a call or a put option, is known as the option holder. He enjoys the right to buy or sell the underlying asset at a specified price on or before a specified time. His upside potential is unlimited, while losses are limited to the premium paid by him to the option writer.