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How Does Options Pricing Work?

Options are financial derivatives that give the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price and time. Options are often used as a way to hedge risk or speculate on the direction of the underlying asset.

There are two types of options: call options and put options. A call option gives the holder the right to buy the underlying asset at a certain price, known as the strike price, while a put option gives the holder the right to sell the underlying asset at the strike price.