Options Contract

Explanation

Options serve three primary purposes: hedging (protecting against adverse price moves), income generation (selling covered calls or cash-secured puts), and speculation (leveraged directional bets). Key terms: strike price (the agreed-upon transaction price), expiration date (when the right expires), premium (the price paid for the option). American options can be exercised any time before expiration; European options only at expiration. Options pricing depends on six factors: underlying price, strike price, time to expiration, volatility, interest rates, and dividends.