What is an Option?
An option is a contract between a buyer and a seller. Option gives the buyer of an option the right to buy or sell the underlying asset at a specific price on or before a specified date. Compared to stocks, options can provide investors with more trading strategies. It's important to note that trading options is generally riskier than investing in stocks.
The option owner has the right to exercise the contract or not, whereas the seller has the obligation to make good on the contract if it's assigned. When the owner of the contract exercises it, the seller is assigned.
Types of Options
Options can be classified according to the rights of the option buyer as call options (Call) and put options (Put):
Call Option A call option, also called a right to buy, gives the option holder the right to buy a certain asset at a specific price for a specific period of time. A call option is similar to taking a long position in a particular stock, where the buyer of an individual call option hopes that the stock price will rise significantly before the option expires.
Put Option A put option, also called a right to sell, gives the option holder the right to sell a certain asset at a specific price for a specific period of time. A put option is similar to taking a short position in a stock, where the buyer of an individual stock put option hopes that the stock price will fall before the option expires.
Disclosure
Options trading entails significant risk and is not appropriate for all investors. Investors should consider their investment objectives and risks carefully before investing. To learn more about the risks associated with options, please read the Characteristics and Risks of Standardized Options before you begin trading options.