The underlying assets can be equities, indices, commodities, fixed income securities, currencies or futures contracts. Call options give the holder the right to buy the underlying asset at the strike price, while put options give the holder the right to sell the underlying asset at the strike price.
People buy options for different reasons.
Call options allow investors to lock in a purchase price if they wish to buy a stock at a later date, while put options are often purchased as a form of insurance against an unanticipated drop in the price of an asset or assets held in a portfolio. While many investors purchase options as part of their broader portfolio strategy, options can be actively traded in their own right. This is known as 'time decay', and should be understood by investors before they start trading options. Holding all other factors constant, call prices are positively related to the underlying asset price and interest rates, while put prices are positively related to the strike price. Option Value Option prices are made up of two components.