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Options
As early as 1000 B.C., we can see an early sign of options. According to the Fundamentals of Corporate Finance, Thales the Philosopher knew from the stars that there would be a great olive harvest. Thales did not have much money, but was able to purchase options for the use of olive presses. When the harvest arrived he was able to rent the presses at a substantial profit. Thales speculation on the harvest allowed for him to purchase rights to the presses. He could then exercise his rights if his speculations on the harvest were correct.
An option is a contract giving the buyer the right to buy or sell an asset at a specific price for a limited time. An option is a contract between the buyer and seller with defined parameters. The asset that is bought or sold is called the underlying. This underlying asset could be a commodity, a futures contract, or stock. The seller gives the buyer the rights for a sum of money called a premium. The price that the underlying right is bought or sold at is called the exercise price. The two types of Options are Calls and Puts.
When an option gives the buyer the right to purchase underlying assets from a writer is called a call option. The call option is the most straightforward strategy for capitalizing on an anticipated increase in the price of the underlying asset. The investor that buys a call option is said to be in a long call position. An investor that believes the price of an underlying asset will decline or remain the same, can if his speculations are correct, realize income by selling a call ...