Contract Specifications
Every financial option is a contract between the two counterparties with the terms of the option specified in a term sheet. Option contracts may be quite complicated; however, at minimum, they usually contain the following specifications:
- whether the option holder has the right to buy (a call option) or the right to sell (a put option)
- the quantity and class of the underlying asset(s) (e.g., 100 shares of XYZ Co. B stock)
- the strike price, also known as the exercise price, which is the price at which the underlying transaction will occur upon exercise
- the expiration date, or expiry, which is the last date the option can be exercised
- the settlement terms, for instance whether the writer must deliver the actual asset on exercise, or may simply tender the equivalent cash amount
- the terms by which the option is quoted in the market to convert the quoted price into the actual premium – the total amount paid by the holder to the writer
Read more about this topic: Option (finance)
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