Options Trading: A Right, Not an Obligation

Options trading can be a powerful tool in your financial toolkit, offering unique opportunities for speculation, hedging, and income generation. But what exactly is an option?

What is an Option?

An option is a financial contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset (like a stock) at a predetermined price on or before a specific date.

It's a "derivative" because its value is derived from the price movement of the underlying asset.

The Two Core Types

Options come in two main types:
Call Option: Gives the buyer the right to buy the underlying asset at a specific price. Buyers typically use calls when they believe the asset's price will rise.

Put Option: Gives the buyer the right to sell the underlying asset at a specific price. Buyers typically use puts when they believe the asset's price will fall.

Key Terminology

Understanding these three terms is essential for any options trader:
Strike Price: The fixed price at which the underlying asset can be bought or sold (the agreed-upon price in the contract).

Expiration Date: The date the option contract expires and becomes void.

Premium: The price the option buyer pays to the option seller (the cost of the contract itself).