What does an option contract look like?
The first feature to learn about in an option contract is the strike price. This is the pre-agreed price that the holder can buy or sell the asset at if they choose to trigger their contract. This price remains fixed throughout the full period of the contract, and it does not have to match the market price. Market prices fluctuate, while the option contract price always remains the same.
The next thing to learn about is the contract size. This outlines how much of an asset the option contract refers to. Once again, the size is fixed from the contract start date and does not change. For example, if the contract is agreed for 100 shares, then the contract will always be for 100 shares. If the holder decides to trigger their contract, they have to purchase/sell the full 100 shares.
The option contract expiration date does what it says on the tin. Every single option contract comes with an expiration date, which is pre-agreed. This date stays the same throughout the duration of the contract. If the holder chooses not to trigger the contract before the expiration date, all terms of the contract expire.
The next feature to talk about is the intrinsic value. All money call options have this. The intrinsic value is the strike price minus the current price of the underlying security.
The settlement of an option is a process that only ever happens if the options contract is triggered. When the contract is first entered into, no assets are exchanged. It is up to the holder to decide whether to actually trigger the contract and therefore trigger that exchange. The settlement only happens in this case. If the contract runs down and expires, no settlement takes place.
No obligation is a useful term to remember as it is very important when it comes to options contracts. Remember, an investor has no obligation to do anything with an options contract. They can buy or sell at the pre-agreed price, but they can also choose to let the contract expire. From start to finish, it always remains an option, not an obligation.