An option contract is an agreement that grants one party the right (but not the obligation) to buy or sell an underlying asset at a specific price on or before a predetermined date. Regarding purpose, there are two types of options contracts: call options and put options. A call option gives the holder the right to purchase the underlying asset in the future, while a put option gives the holder the right to sell the underlying asset in the future.

Option contracts are used for various purposes, including hedging risk and speculation. The buyer of an option can use them for speculation while minimizing the risk of loss. Options can also be combined to execute unique strategies.

The main components of an option contract include:

• Underlying Asset: This could be stocks, commodities, currencies, etc.

• Expiration Date: The date by which the option must be exercised or it expires.

• Strike Price: The price at which the holder can buy or sell the underlying asset, as determined when the option contract is signed.

• Contract Size: Refers to the quantity of the underlying asset that one option contract represents.

  
  

• Settlement Method: Either physical delivery of the asset or cash settlement.

  
  

• Option Premium: The cost paid by the buyer to own the option. This premium is determined based on several factors, including the value of the underlying asset, the time until expiration, and market volatility.

  
  

• Type of Option: There are two common types: American options, which can be exercised at any time before expiration, and European options, which can only be exercised on the expiration date.

  
  

Example: A person expects that the price of 100 shares of ABC stock will rise from 50,000 VND per share to 70,000 VND per share within the next two months. However, if they purchase the shares now, they risk the price dropping to 30,000 VND per share. If this risk materializes, the investor would incur a loss of 20,000 VND multiplied by 100 shares, equaling 2,000,000 VND.

To avoid this risk, the investor can buy a call option on ABC shares with an expiration date two months later, paying an option premium of 5,000 VND per share and setting the strike price at 50,000 VND per share. If the share price increases to 70,000 VND per share at expiration, the investor's profit will be (20,000 VND minus 5,000 VND) multiplied by 100 shares, resulting in a profit of 1,500,000 VND. If the share price drops, the investor can choose not to exercise the option and only loses the 500,000 VND paid for the option premium. Thus, by using the option contract, the investor minimizes potential losses when the risk occurs.

Source: Multiple sources