An option contract is a derivative contract that grants its owner the right, without the obligation to buy (for a call option) or sell (for a put option) a specific amount of a given security, commodity, currency, or debt, at a predetermined (fixed) price (known as the exercise price) on or before a given day (within a specified period of time).
An option can be closed out in one of many ways, including:
- Exercise: the option ends up with the option’s holder taking or marking delivery according to contractual terms.
- Expiration: the option’s holder may simply allow the option to expire.
- Sale: the holder may choose to sell the purchased option (long option) at current market value.
- Buy-back: the holder may choose to buy back a sold option (short option) at current market value.
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