DEFINITION of 'Physical Option'

An option that is based on a physical asset. Physical options give the owner the right to buy or sell physical assets at a predetermined price and date. They are called "physical" because they are based on assets such as currencies, Treasury debts and commodities, rather than stocks, futures and indexes.

BREAKING DOWN 'Physical Option'

As with any other type of option, you can purchase a call or put. You have the right to "call in," or buy, a physical asset by owning a physical call option; you have the right to "put out," or sell, a physical asset by owning a physical put option.

The Chicago Board Options Exchange (CBOE) trades physical options that represent underlying assets such as gold or electricity.

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