What Is an Option?
An option is a financial contract that gives the buyer the right, but not the obligation, to buy or sell a stock at a specific price before a specific date.
What an Option Is
There are two types of options:
Call Option → Right to buy a stock at a set price.
Put Option → Right to sell a stock at a set price.
Why Options Exist
Options allow traders to:
- Reduce risk (hedging)
- Generate income
- Speculate on price movement with limited capital
- Leverage capital (control 100 shares with 1 contract)
Basic Terminology
Contract → Controls 100 shares.
Premium → Price you pay or receive for an option.
Strike Price → The fixed price you can buy/sell the stock.
Expiration Date → Last day the contract is valid.