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An equity option is a financial contract between the issuer of the option and the ultimate holder of the option that gives the holder the right, but not the obligation, to buy or sell a stock or share at a given price per share (often referred to as the ‘strike� price) on or before a given future specified date.

An option contract will outline and specify details agreed between the parties. This will typically include:

• whether the option holder has the right to buy or the right to sell;
• the description and quantity of the underlying asset;
• the strike price (see STSM112010), also known as exercise price (see STSM112050), which is the price at which the underlying transaction will take place upon exercise;
• the expiry date of the option (which is also the last date the option can be exercised);
• confirmation of settlement terms i.e. whether the issuer &/or holder of the option is obligated on exercise of the option to deliver/receive the actual asset, or simply arrange a cash settlement; and
• specify the premium (see STSM112020) that is to be paid by the option holder to the issuer of the option for the writing of the option contract.

»Ê¹ÚÌåÓýapp quantity of shares in an equity option is written and traded in terms of contract size, where one contract size option typically represents 1000 underlying shares. So, for example, a ‘two optionâ€� contract to buy will represent a right to acquire 2000 shares (2 x 1000) in the underlying security.