Options
Options are financial derivatives that give the holder the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a predetermined price within a specified time period. They are widely used by investors and traders for various purposes, including speculation, hedging, and generating income.
Features
- Options come in two primary types: Calls and Puts.
- Call options provide the holder with a chance to buy the underlying asset, with the strike price being the point at which they can exercise their options before the expiration.
- Put options are characterized of giving the holder the right to sell the underlying asset at the strike price until the expiry date.
- They are also short-term contracts that have a particular expiry date and from that point on, they start to devalue and becomes worthless.
- Choices are universally applicable across different applications such as protection, giving away, and income creation through manufacturing options.
Advantages
- Leverage: Opportunities can enable investors to dominate a sizable market share in the asset they want with a conservative capital outlay.
- Flexibility: Investors can employ options for portfolio management and risk reduction, or for betting on price movements, or for collecting income by selling (writing) options contracts.
Disadvantages
- Expiration: The owner of an option has a specific expiry date and beyond which the option will have no value if it has become worthless.
- Complexity: Options trading entails two-fold understanding of complex strategies and valuation techniques that are used in options markets and which are also important to be familiar with, including tenets of sophisticated options valuation models.
Examples
- Purchasing of a call option on a stock for the purpose of aiming profits by expected price rise.
- Buying a put option on a large stock index in order to shield the assets against expected market declines.
- Employing Currency tools to mitigate the Foreign Exchange risk posed by the International Trade.
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