What Is an Option?
An option is a financial derivative that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on or before a specified date. Options are typically used as part of a larger investment strategy and can be used to hedge against risk in other investments. They also provide investors with leverage since they require only a small amount of capital upfront compared to buying stocks outright.
Options come in two varieties: calls and puts. A call option gives its owner the right to purchase an underlying asset at an agreed-upon price within a certain period of time while put options give their owners the right to sell an underlying asset at an agreed-upon price within a certain period of time. The buyer pays for this privilege by paying what’s known as “premium” which is essentially just another way of saying cost for purchasing these rights from someone else who owns them already (the seller).