OPTION PRICE Meaning and
Definition
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Option price refers to the agreed-upon value at which a financial derivative, known as an option, can be bought or sold. An option is a contract that confers the right, but not the obligation, to buy or sell a specific underlying asset, such as stocks, bonds, commodities, or currencies, at a future date, known as the expiration date. The option price, also commonly referred to as the strike price or exercise price, is a crucial factor in determining the profitability of an options contract.
The option price is predetermined and specified within the option contract. It is the price at which the underlying asset can be bought or sold when the option is exercised. For call options, the option price is the price at which the buyer can purchase the asset, while for put options, it is the price at which the buyer can sell the asset.
The relationship between the option price and the market value of the underlying asset plays a significant role in determining the utility of an option. If the option price is lower than the market value of the underlying asset, the option is considered "in the money" and is typically more valuable. Conversely, if the option price is higher than the market value of the underlying asset, the option is considered "out of the money" and may have little to no value.
Traders and investors closely monitor option prices to assess potential profitability and risks associated with options positions. Market conditions, including supply and demand dynamics, volatility, and interest rates, can influence option prices.
Common Misspellings for OPTION PRICE
- iption price
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- ootion price
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Etymology of OPTION PRICE
The word "option" originates from the Latin word "optio", which means choice or right of choosing. Its usage in the context of financial contracts can be traced to the early 18th century.
"Price", on the other hand, comes from the Old French word "pris", which means value or worth. It has evolved over time to refer to the amount of money required to purchase or obtain something.
The combination of these terms, "option price", refers to the cost or value associated with acquiring or exercising an option contract, which grants the holder the right to buy or sell an underlying asset at a predetermined price within a specified period.
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