Option Trading Explained

What is an option?

An option is a financial derivative, a contract that gives the buyer the right, but not the obligation, to buy or sell the underlying asset at a specified price (the exercise price or strike price) and a certain date. Each option contract has a specific expiration date by which the holder must exercise their option. The stated price on an option is known as the strike price or exercise price. However, since the options contract isn't an obligation to buy or sell the underlying security, option buyers also have the option to let the contract expire. But when buying options, you’ll pay what’s known as a “premium” up front, which you’ll lose if you let the contract expire.

Traders and investors buy and sell options for several reasons. Options speculation allows a trader to hold a leveraged position in an asset at a lower cost than buying shares of the asset. On another hand, investors use options to hedge or reduce the risk exposure of their portfolios. Although there are many opportunities to profit with options, investors should carefully weigh the risks.