Option
A contract giving the buyer the right, but not the obligation, to buy (call) or sell (put) an asset at a fixed price by a fixed date.
The exam loves to make you sort a payoff diagram by who holds the right and who owes the obligation. The tell is the kinked, hockey-stick shape: a long position’s profit line is flat then sloped (loss floored at the premium paid), and a short position is the vertical mirror (gain capped at the premium received). A favorite trap pairs an option against a forward or futures — the give-away is that forwards have a linear, symmetric payoff with no premium, so each party carries two-sided risk (a long forward’s loss is bounded only because the asset can’t fall below zero), whereas only options buy that asymmetry with an upfront cost.
Do not confuse the option (the contract) with the strike (the fixed exercise price baked into it) or the premium (what you pay to own it) — questions deliberately blur the three. Remember that moneyness compares spot to strike, yet the premium stays positive even out-of-the-money, because time value survives when intrinsic value is zero. Hook: you buy the option, you pay the premium, you exercise at the strike — three words, three roles.
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