Options are financial contracts providing the holder with the choice, though not the obligation, to buy or sell a specific asset, often a stock, at a predetermined price, termed the strike price, on or before an agreed-upon future date, known as the expiration date. Frequently utilised in the stock market, options serve as tools for both speculation and risk management.
There are two primary types of options:
- Call Options: Holding a call option grants the holder the right to purchase the underlying asset at the strike price before or on the expiration date. Essentially, this means that call option holders have the opportunity to buy the underlying stock at the strike price, irrespective of its current market value. Traders often use call options when they anticipate an increase in the underlying stock’s price. By acquiring a call option, they can profit from the potential price rise without owning the stock outright.
- Put Options: Holding a put option gives the holder the right to sell the underlying asset at the strike price before or on the expiration date. Typically favuored by traders who forecast a decline in the underlying stock’s price, put options offer a protective mechanism. They enable holders to sell the stock at the strike price, safeguarding them from potential losses resulting from a decrease in the stock’s value.