Options Contract

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An options contract is a type of derivative which gives the buyer the right but not the obligation to perform a specified trade. For a given asset, the option will be defined by its: direction, expiration date, and strike price.

If the direction allows the contract holder to buy the asset then it is a call option. Conversely, an option to sell an asset is known as a put option. The expiration date is the date by which the contract must be executed.

A European option can only be exercised on the expiration date. An American call option can be exercised on any date until and including the expiration date. Due to this increased optionality, an American option must be worth at least as much as a European option, assuming all other criteria are equal.

The strike price is the price that an asset will sell at in the specified trade. For example, a call option on 1 bitcoin with a strike price of $10,000 gives the contract’s buyer the right to buy 1 bitcoin for $10,000, regardless of the price that Bitcoin is trading at in other markets.