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What is an Option?

An option is the right to buy (call) or sell (put) a certain quantity of the underlying instrument at any given time during the defined period (lifetime) at an agreed price (exercise Price).

The underlying instrument is the asset which the buyer of a call can buy or the buyer of a put can sell. The range of possible underlying instruments (or "underlyings") includes shares, commodities, currencies, bonds/interest rates, futures or equity indices.
The lifetime is the period of time during which the buyer may exercise the option right against the writer.
European-style = Options which are only exercisable at the end of their lifetime
American-style = Options which are exercisable during the entire lifetime
Price at which the call or put holder can buy or sell the underlying instrument.
The holder of a call option is entitled to buy the underlying instrument at the price agreed in advance.
The holder of a put option is entitled to sell the underlying instrument at the price agreed in advance.
The buyer of an option is referred to as the holder of the option. For the acquired right he pays the seller of the option, the option premium.
The seller of an option is referred to as the writer of the option. For this right he receives the option premium from the buyer. As the seller of a put option he has to accept the delivery of the underlying instrument. As a seller of a call option, he must give up the exercise price to the underlying asset.

Example Eurex equity option:

Underlying instrument: Siemens
Contract size: 100 shares
Exercise price: EUR 100
Lifetime: Third Friday in September 2014
Option type: Call
Option premium: EUR 4.80

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