What is an options contract and how does it work?

Learn how investors buy and sell puts and calls to turn a high profit with options contracts.

Investors use options contracts to buy and sell assets in the future at set prices to turn a profit. The agreed-upon date in the future is called an expiration date, and the set price is called the strike.

There are two types of options contracts: puts and calls. Use puts to profit if you think future prices will fall; use calls to profit if you think they’ll rise. But either way, both types of options contracts let you buy and sell options to yield the highest profit before the expiration date. Interested in learning more about options contracts? Explore these helpful tips below to take a deeper dive.

What are options contracts used for?

You can use an options contract to turn a profit and/or hedge the values of an investment you already own. However, because options contracts can be risky, it’s recommended that you use this type of contract for future real estate or stock values you can confidently predict.

How are options contracts and futures contracts different?

Futures contracts and options contracts are similar: They both let you set prices in the present for things that can be bought and sold in the future. Both are used in hopes of turning a profit.

Their single biggest difference is that an options contract lets you buy or sell shares before the contract’s expiration date. A futures contract means you have to buy or sell on the expiration date.

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