|The definitions of Calls and Puts are shown below:
|So for example, a Call option on HSBC shares with a Strike Price of 800p and an expiry date of 1st June 2003 would provide the holder with the right to buy HSBC shares at a price of 800p per share from the option seller on the 1st June 2003.
Similarly for a Put option. The holder of a Put option on HSBC shares with a Strike Price of 800p and an expiry date of 1st June 2003 would have the right to sell HSBC shares at a price of 800p per share to the option seller on the 1st June 2003.
Note that if the right to exercise the option only occurs on the expiry date itself then this is called a European style option whereas if the option can be exercised on any day up to and including the expiry date then it is called an American style option.
Financial options are generally available either via a listing on a stock or options market such as the London International Financial Futures and Options Exchange (LIFFE) or Eurex, or are traded directly between two counterparties in the wholesale market. In the former case the options are called "exchange traded options" and in the later case they are called "over-the-counter" or OTC options.
Options that are listed on an Exchange but are not issued by the Exchange, are called warrants.
The purchaser of an option must pay a premium to the seller. This premium is normally paid upfront.
So in the example of the Call Option above, if the premium for the option was 25p per option then the option buyer would need to pay 25p upfront to the seller for the right to buy each HSBC share at a price of 800p at the expiry date of the option.