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futures contracts actually result in delivery of the underlying
commodity; most are offset. Futures contracts involving sales and
purchases of commodities are regulated by the Commodity Futures
Trading Commission through the Commodity Exchange Act.
A securities option is the right to buy or sell an underlying
security at a specific price (the “strike price”) and a specified
time (the expiration date). There are two types of options: “Call”
options and “put” options. In a call option, the grantor (or
seller) of the option is required, if the buyer so desires, to sell
the underlying security to the buyer at the strike price on the
expiration date. The buyer of a call option has the right to
“call” the security from the seller. The buyer is “bullish” on the
underlying security; he is betting that the market price of the
underlying security will rise above the strike price. If that
happens, the option buyer will purchase the security on the
expiration date at the strike price, which will be less than the
current market price. With a put option, the grantor (or seller)
of the option is required, if the buyer so desires, to purchase at
the expiration date the underlying security put to him by the buyer
at the strike price. In this latter case, the buyer is “bearish”
on the underlying security. He is betting that the market price of
the underlying security will fall below the strike price by the
expiration date. In that case, he will “put” the security to the
option writer, who must pay the higher strike price.
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Last modified: May 25, 2011