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Correspondingly, how does an option work?

If you buy an options contract, it grants you theright, but not the obligation to buy or sell an underlying asset ata set price on or before a certain date. A call option givesthe holder the right to buy a stock and a put option givesthe holder the right to sell a stock.

Also Know, what are put options and call options? However, they are not obligated for the same. A calloption permits buying of an option whereas a putoption will permit selling of an option. Calloption generates money when value of the underlying asset isrising upwards whereas Put option will extract money whenvalue of underlying is falling.

Furthermore, what does it mean to exercise an option?

Exercising a stock option means purchasingthe issuer's common stock at the price set by the option(grant price), regardless of the stock's price at the time youexercise the option. See About Stock Optionsfor more information.

How do option premiums work?

The premium is the price a buyer pays the sellerfor an option. The amount of the premium isdetermined by several factors - the underlying stock price inrelation to the strike price (intrinsic value), the lengthof time until the option expires (time value) and how muchthe price fluctuates (volatility value).