Option

Option

Explanation: An option is a financial derivative that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specific time period. There are two types of options: calls and puts. A call option gives the holder the right to buy, while a put option gives the holder the right to sell. Options are used for hedging, speculation, and income generation.

Example: An investor purchases a call option for Company XYZ stock with a strike price of $50, expiring in three months. If the stock price rises above $50, the investor can exercise the option to buy the stock at $50, potentially making a profit.

Reference Link: For more information on options, visit Investopedia’s Option.

FAQs:

1. What are the main types of options?
   • The main types are call options (right to buy) and put options (right to sell).
2. How are options different from stocks?
   • Options are derivatives that derive value from an underlying asset, while stocks represent ownership in a company.
3. What is the strike price of an option?
   • The strike price is the predetermined price at which the option holder can buy or sell the underlying asset.
4. Can options expire worthless?
   • Yes, if the underlying asset does not reach the strike price by the expiration date, the option can expire worthless.
5. What is the difference between American and European options?
   • American options can be exercised at any time before expiration, while European options can only be exercised at expiration.