ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Options - The Basics

Updated on March 17, 2019

How many readers have traded options?

Have you ever traded options?

See results

Options Basics


An option is a financial contract where the seller (option writer) agrees to transact at a set future expiry date, at a fixed price (Strike Price) for a fixed quantity of the underlying asset. The buyer of the option pays an up front cash premium to the writer in return for the right but not the obligation to deal under the terms of the option.

Options can be written over Currencies, Interest rates, Bonds, Equities, Equity Indices, Precious metals and commodities. They are used for risk management, trading and income generation.

Call Option

A call option gives the buyer the right but not the obligation to buy a fixed amount of the underlying asset at a certain date at the strike price.

Put Option

A put option gives the buyer the right but not the obligation to sell a fixed amount of the underlying asset at a certain date at the strike price.

Exchange Traded Options

An exchange traded option (ETO) is traded on a formal market place such as an equities exchange or a commodities exchange. Exchange traded options will generally have fixed amounts, there is typically one expiry date per month and there will be a range of strike prices for each maturity. Generally the exchange will guarantee settlement of the options contract and will take collateral from the option writers to cover their risk/exposure. The key advantage of ETOs is that the price is set by the market. The key disadvantage is that ETO's are not tailored to the buyers specific needs and there can be a mismatch between the options terms and the buyers requirements. This is known as basis risk.

Over The Counter Options

Over the counter options are generally written by banks to enable their clients to manage risk. They can be tailored to suit the clients requirements for price, strike rate and expiry date. The key advantage of an OTC option is that the buyer can eliminate basis risk. The disadvantage is that the price is not transparent and the premium costs will in most circumstances be higher.

American or European Styled Options

A European styled option can only be exercised at maturity. An American styled option can be exercised at any time up to or upon maturity.


Put simply the key determinants of price are:

Time value, the length of time to expiry.

Intrinsic value, the level of the strike price compared to the market price.

The volatility of the underlying asset or instrument.

The rate of change in volatility over time.


The risk to the buyer of a vanilla put or call option is the premium paid.

The risk to the seller of a vanilla call option is that the underlying asset rises in value beyond the strike price. If the option writer does not own the appropriate quantity of the underlying asset the writer will have to cash settle and the loss would be the difference between the strike and market price times the volume of asset stipulated in the option. The worst case is infinite.

The risk to the seller of a vanilla put option is that the underlying asset falls in value below the strike price. The option writer will be obliged to purchase at the strike price and either hold the underlying asset or cash settle. The loss will be the difference between the strike and market price times the volume stipulated in the contract. The worst case would be if the underlying asset was to become worthless.

Read The Details

Options are complex financial instruments. Wether you are transacting in ETO's or OTC options it is vital that you fully understand the product and any potential obligations you may incur.


This website uses cookies

As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

Show Details
HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
LoginThis is necessary to sign in to the HubPages Service.
Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
AkismetThis is used to detect comment spam. (Privacy Policy)
HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
MavenThis supports the Maven widget and search functionality. (Privacy Policy)
Google AdSenseThis is an ad network. (Privacy Policy)
Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
Index ExchangeThis is an ad network. (Privacy Policy)
SovrnThis is an ad network. (Privacy Policy)
Facebook AdsThis is an ad network. (Privacy Policy)
Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
AppNexusThis is an ad network. (Privacy Policy)
OpenxThis is an ad network. (Privacy Policy)
Rubicon ProjectThis is an ad network. (Privacy Policy)
TripleLiftThis is an ad network. (Privacy Policy)
Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)
ClickscoThis is a data management platform studying reader behavior (Privacy Policy)