Two types of option contracts exist: a purchase stock option agreement (“the Call”) or a sale stock option agreement (“the Put”).
The person benefiting from the option contract buys the right of option for the payment of a share payment paid to the issuer. The option allows from then on the beneficiary, if he decides to exercise it, to buy (Call) or to sell (Put) a title to the issuer of the option at a price set in advance within a given time period determined by the contract.
Therefore, the option contract is a bet on the increase or the decrease of the price of the good in the future.
A difference exist between European and American option exercises:
- The US Call allows the beneficiary to exercise his option during all the time period determined in the contract.
- The EU Call or Euro Call only allows the beneficiary to exercise his action the last day of the given period of time.
Options are mostly put for securities, actions, obligations or raw materials.