Options are financial derivatives that give the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price (strike price) on or before a specified date (expiration date). Options are typically used as a form of risk management or for speculative purposes.
There are two main types of options: call options and put options. A call option gives the holder the right to buy an underlying asset at a specified price, while a put option gives the holder the right to sell an underlying asset at a specified price.
Options can be used in various ways, depending on the investment objective and risk appetite of the trader. Some of the common uses of options include:
Hedging: Options can be used to hedge against potential losses in other positions. For example, a trader who owns a stock can buy a put option to protect against a potential decline in the stock’s price.
Speculation: Options can also be used for speculative purposes, such as betting on the direction of the price of an underlying asset.
Income generation: Options can be used to generate income through the selling of options premium.
Options trading can be a complex and risky undertaking, as options prices are affected by a number of factors such as volatility, time decay, and changes in the underlying asset’s price. Therefore, it’s important to have a good understanding of options trading before engaging in it.