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Option Contract

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An option contract, sometimes simply called an option, is an exchange-traded derivative instrument that gives the option holder the right, but not the obligation, to trade the underlying asset for a specific price. Electing to make the trade is known as exercising the option contract. If the option contract is a call option, the option holder can buy the underlying asset for the strike price. If the option contract is a put, the holder is entitled to sell the underlying upon exercise. An option contract always has an expiration date. Depending upon whether the option contract is an American option or a European option, exercise may be possible either any day up to or only on the expiration date, respectively. The counterparty to the option holder for an option contract trade is known as the option writer.

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