Option

What is an option?

An option is a contract that gives the buyer the right to buy or sell a specified asset at a certain price before or on a certain date. That is, an option is a contract in which the subject of bargaining is not the asset itself, but the right of its primary sale or purchase. The obligation to fulfill the option lies with its seller, who can be either the underlying asset’s buyer (put option) or seller (call option).

Option expiration is a certain day before the owner must decide on its execution.

Options can be used for:

• Hedging. Hedging is similar to insurance, and options can be used to insure an investment against a downturn.

• Speculation. These are bets on the movement of securities.

Types of options

1. Call option gives the option holder the right to purchase an asset at a specific price over a specified period of time.
2. Put option gives the purchaser of an option the right to sell an asset at a specific price within a specified period of time.