Have you ever wondered how traders and investors protect themselves against market uncertainties or even capitalize on potential opportunities?
One of the tools they often use is called options. While the term may sound intimidating, options are actually financial instruments that can be quite straightforward to understand.
In this article, we will explore what options are and shed some light on this fascinating world of derivatives.
What are Options?
Options are a type of financial derivative. Now, you might be wondering, what on earth is a derivative? Well, think of it this way: derivatives are like siblings to other financial products.
They derive their value from an underlying asset, such as stocks, bonds, or commodities.
In the case of options, the underlying asset can be almost anything tradable, giving investors a wide range of possibilities.
To put it simply, an option provides its owner the right, but not the obligation, to buy or sell the underlying asset at a predetermined price within a specified period.
These predetermined price and period are known as the strike price and expiration date, respectively.
Options are usually traded on organized exchanges, providing a marketplace where buyers and sellers can meet and trade these contracts.
