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Definition of 'Options'

Options give the buyer the right to either buy (call options) or sell (put options) a certain financial instrument or commodity at a fixed price on a specified date in the future. It also gives the seller (also known as the option writer) the obligation to provide the specified financial instrument or commodity at the price on the date specified in the contract.

Options are generally exercisable in European or American style. European style options can be exercised on the expiration date only. American style options can be exercised on any date up to and including the expiration date.

There are six factors that determine an options price: (1) Price of underlying instrument (2) Interest rate (3) Time to expiration (4) The Strike Price (5) Volatility (6) Dividends.

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