13 Options

13.1 Definitions

An option is a contract that gives you a right, but not an obligation, to buy or sell an asset at a predetermined price (the exercise price) at or before some future time (the maturity date). The asset is usually a number of stocks, and we will concentrate on such options. We also distinguish between European and American options. A European option can only be exercised at the maturity date, while an American option can be exercised at any time before the maturity date. We will restrict our discussion to European options.

An option that gives you the right to buy a stock is named a call option, while an option that gives you the right to sell a stock is named a put option. In each case, there is one buyer and one seller ...

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