Finance Dictionary
Option
Definition
A financial derivative that represents a contract sold by one party to another party.
Deep Dive
An option is a financial derivative contract that grants the buyer the right, but not the obligation, to buy or sell an underlying asset (such as a stock, commodity, or index) at a predetermined price (known as the strike price) on or before a specified date (the expiration date). There are two primary types: a "call option" gives the holder the right to buy the asset, while a "put option" gives the holder the right to sell the asset.
Examples & Use Cases
- 1An investor buying a call option on a tech stock, believing its price will surge above the strike price before the option expires
- 2A portfolio manager purchasing put options on their stock holdings to protect against a potential market downturn
- 3An employee receiving stock options as part of their compensation, giving them the right to buy company shares at a set price in the future.
Related Terms
DerivativesFutures ContractStrike PricePremiumHedgingSpeculationCall OptionPut Option