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An option is a contract which gives the buyer the right, but not the obligation to buy or sell metal or the index at a specific price for a specified time. For this right, the buyer pays a premium. The buyer of LME-traded options has three choices of activity:
- Exercise (declare) the option. They will receive a futures contract as specified in the option contract
- Abandon the option, whereby nothing happens but they lose their premium
- Trade the option by selling it back to the market, so reclaiming some or all of the premium or even making a profit (or loss).
There are two types of options calls and puts:
- A call option gives the buyer the right but not the obligation to buy the underlying metal or index contract. The seller of a call option has the obligation to sell the underlying metal or index contract should the buyer exercise.
- A put option gives the buyer the right but not the obligation to sell the underlying metal or index contract. The seller of a put option has the obligation to buy the metal or index contract should the buyer choose to exercise.
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