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Options
Definition
Financial option buyers have the right, but not obligation, to exercise their option to sell or buy an asset at a pre-determined price, also known as the strike price, at some time in the future. The option seller receives a premium (like the term used in insurance markets) for granting the option rights to the buyer. There essentially only two options: calls - a right to buy and puts - a right to sell. All options positions are constructed from buying and selling puts and calls. There are American style options, which may be exercise at any time up until expiration. And there are European style options, which may only be exercised upon expiration.
Using the term Options :
Expecting a big upward move in the stock of Company XYZ in the next two months, Geoff McDaniels purchased call options that grant him the right to buy the stock in the future at a pre-determined strike price. This allows Geoff to leverage his buying power (in this case, controlling more stock with a smaller amount of money as he only has to pay the premium upfront).
Pay Special Attention To :
One option normally represents 100 shares of the underlying stocks. Options are normally traded by professionals and you should take special care before utilizing options in your portfolio to understand that attendant risks.
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Related terms
Derivatives , Puts , Calls , Futures, Hedging
'Options' appears in the definitions of these other terms:
American Option Call Option Currency Risk Hedging Put Option Zero-Cost Collar
