A contract which gives the holder, in return for paying a premium to the option seller, the right to buy or sell a financial instrument or commodity during a given period. Option trading is used in the futures and share markets and a significant volume of option trading takes place over-the-counter (OTC), ie, not on an exchange. Financial futures options were introduced on the Sydney Futures Exchange in 1982 and were the first such options in the world. Futures options offer buyers a useful method of limiting risk: if the option is not exercised the option taker (buyer) is limited in outlay to the cost of the premium on the option, plus brokerage. Likewise, options over shares offer the right but not the obligation to buy or sell the underlying share. Options over shares were introduced on the Australian Stock Exchange in 1976 and are actively traded on ASX Derivatives. Options can be either call options, which give the option holder, in return for paying a premium, the right to buy from the grantor of the option at the strike price, or put options which give the option holder, in return for paying a premium, the right to sell to the grantor of the option at the strike price. See also: American option, Asian option, ASX Derivatives, currency option, European option, exchange-traded option, futures markets, interest-rate option, option spread, option straddle, over-the-counter options, strike price.
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