Underlying Security

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Definition of 'Underlying Security'

When trading derivatives, the underlying security is the stock, commodity, future, or currency that underlies the derivative. A derivative is a traded instrument such as an option or future.

The underlying security is what needs to be delivered to the buyer of the derivative when the derivative is exercised or expires. The buyer receives the underlying security and the seller delivers it.

In reality, most derivatives that are traded are closed out before expiration and delivery of the underlying security does not take place.

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