Options

Options refer to Financial Derivatives that provide the buyer with the right, but not the obligation, to buy or sell an underlying Asset at a predetermined price, known as the Strike Price, before or at a specific expiration date.

There are two primary types of options:

• Call Option: Gives the holder the right to buy the underlying asset.
• Put Option: Gives the holder the right to sell the underlying asset.

Examples:

• If an investor purchases a call option for Company XYZ’s Stock with a strike price of $50, and the stock rises to $70, the investor can exercise the option to buy the stock at $50, potentially making a profit.
• If an investor buys a put option for Company ABC’s stock with a strike price of $30, and the stock falls to $20, the investor can exercise the option to sell the stock at $30, thereby limiting losses.

Cases:

• Speculative Case: An investor expects stock prices to rise and buys call options to leverage potential gains.
• Hedging Case: An investor holds a stock and buys put options to protect against potential losses from a decline in the stock price.