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.