Short definition: Options are financial derivatives that give the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price (strike price) on or before a specified date (expiration date).
Explanation: Options are used for various purposes, including hedging (protecting against potential losses) and speculation (betting on the direction of the underlying asset’s price). There are two main types of options: call options (the right to buy) and put options (the right to sell). The value of an option is influenced by several factors, including the price of the underlying asset, the strike price, time to expiration, and volatility.
Example: An investor might buy a call option on a stock they believe will increase in price. If the stock price rises above the strike price before the option expires, the investor can exercise the option and buy the stock at the lower strike price, profiting from the difference.
Additional information (optional): Options are complex financial instruments and involve risks. Investors should carefully consider their investment objectives and risk tolerance before trading options.