Options are contracts that derive their value from an underlying asset, such as stocks, ETFs, or indexes. There are two primary types of options: call options, which allow the holder to buy the asset, and put options, which allow the holder to sell it. Each option has a strike price, which is the price at which the option can be exercised, and an expiration date, which is the last day the option can be exercised. Investors use options for various purposes, including hedging against potential losses, speculating on price movements, or generating income through premium collection.
Options Example
For example, suppose an investor purchases a call option for Company XYZ with a strike price of $50, expiring in one month. If Company XYZ’s stock price rises to $60 before the option expires, the investor can exercise the option, buying the stock at $50 and potentially selling it for $60, realizing a profit. Conversely, if the stock price stays below $50, the investor can choose not to exercise the option, losing only the premium paid for the option.