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Options

Options are contracts that give investors the right but not the obligation to buy or sell an asset. Investors typically use option contracts when they don't want to take a position in the underlying asset but still want exposure in case of large price movements.
There are dozens of options strategies, but the most common include:
  • Long call: You believe a security's price will increase. You buy (go long) the right to own (call) the security. As the long call holder, the payoff is positive if the security's market price exceeds the exercise price by more than the premium paid for the call.
  • Long put: You believe a security's price will decrease. You buy (go long) the right to sell (put) the security. As the long put holder, the payoff is positive if the security's market price is below the exercise price by more than the premium paid for the put.
  • Short call: You believe a security's price will decrease. You sell (write) a call. If you sell a call, the counter-party (the holder of the call) has control over whether or not the option will be exercised. As the writer of the call, your payoff is equal to the premium received from the buyer of the call. However, you face losses if the security's market price rises above the exercise price. The premium you received would partially offset this loss.
  • Short put: You believe the security's price will increase. You sell (write) a put. As the writer of the put, your payoff is equal to the premium received from the buyer of the put. However, you face losses if the security's market price falls below the exercise price. The premium you received would partially offset this loss.