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Option

An option is a financial derivative that gives the holder the right, but not the obligation, to buy or sell an underlying asset, such as stocks, bonds, or commodities, at a specified price (strike price) before or on a certain date (expiration date). Options are commonly used for hedging, speculation, or generating income. There are two types of options: call options (the right to buy) and put options (the right to sell).

Example

An investor purchases a call option for Company X’s stock with a strike price of $50, giving them the right to buy the stock at that price before the option expires, regardless of the stock’s market price.

Key points

• A financial derivative that gives the holder the right to buy or sell an asset at a specific price by a set date.

• Two types of options: call (right to buy) and put (right to sell).

• Used for hedging risk, speculation, and income generation.

Quick Answers to Curious Questions

Call options give the right to buy an asset, while put options give the right to sell an asset at a specified price.

Investors use options to hedge by purchasing puts to protect against falling prices or calls to benefit from rising prices without owning the underlying asset.

Options provide flexibility for hedging, speculation, and income strategies, allowing investors to manage risk and leverage market opportunities.