What is an Option?
An option is a financial instrument that allows traders to buy or sell the underlying asset at a predetermined price, either before or at a certain date. Options can be based on a wide range of underlying assets, including stocks, commodities, indices, currencies, cryptocurrencies, or even another derivative product. The purpose of options trading is to hedge the risks on existing positions, or for speculation.
Types of Options
There are two basic types of options: call options and put options. Call options allow contract traders to buy the underlying asset while put options allow the contract owner to sell the underlying asset. A trader would buy a call option with the expectation that it will rise in value in the future. Conversely, a trader buys a put option with the expectation that the price of the underlying asset will decline in the future.
Options are further categorized into American options and European options based on the dates on which the options may be exercised. American options allow traders to exercise the rights at any time before and including on the expiry date of the options whereas European options can only be exercised on the expiry date of the options.
Options Contract Specifications
If you'd like to read more about options, check out What Are Options Contracts?.