What Is an Option?
An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined strike price before a set expiration date. The seller, known as the writer, sets that strike price and is obligated to honour it if the buyer chooses to exercise.
Calls and Puts Explained
Options come in two main forms. A call option gives the buyer the right to buy the asset at the strike price, while a put option gives the right to sell. Traders choose between the two depending on whether they expect the asset’s price to rise or fall.
Why Traders Use Options
Options can be used to speculate on price movement, or to help manage existing exposure on another position. Because the buyer isn’t obligated to exercise the contract, the most they can lose is typically the premium paid for it.
Options Trading Involves Specific Risks: What to Keep in Mind
As a precaution, options can be complex instruments, and sellers in particular can face losses well beyond the premium received if the market moves against them. It’s worth understanding the mechanics fully before trading options.
Weighing Rights Against Obligations
Options give traders flexibility by separating the right to act from the obligation to do so. That flexibility comes with its own complexity, which is why understanding how strike price and expiration interact matters before using them.
⚠ Risk Warning:CFDs are complex financial instruments and come with a high risk of losing money rapidly due to leverage. Ensure you fully understand how CFDs work and whether you can afford to take the high risk of losing your money.
Back
