Page 244 - A Canuck's Guide to Financial Literacy 2020
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Options
An option is a contract that gives its holder the right to buy or sell an asset within a specified
time frame and price. There are two fundamental types of options, Calls & Puts. A call
option gives the holder the right to buy shares of a security at a set price by a set date. A
put option, on the other hand, gives the holder of the contract the right to sell shares of
a security at a set price by a set date.
Call Options
Call options give the option holder the right but not the obligation to buy the underlying stock
at a predetermined price (known as the strike price) by a specific date, known as the
option’s expiry date. They’re a type of option that increase in value when the underlying
stock rises and are one of the most popular types of options.
For this right, the call option buyer would pay a “premium” which the call option seller will
receive. In contrast with stocks, options have an expiry date where on that date, they may
expire worthless or be exercised.
The major components of an option are
