• Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint
Share this Page URL
Help

Chapter 4. The options primer > What is an option?

What is an option?

An option gives the buyer the right, but no obligation, to buy or sell a stated quantity of a commodity (some “asset”) at a specified price on or before a specific date in the future.

Options are often compared to insurance. When you buy homeowner's insurance, for example, you pay a premium for certain rights. These rights are yours, but the policy can limit the payoff. To some extent, this analogy works for a hedger, but there are major differences when speculating. For example, the option buyer theoretically has unlimited profit potential. Insurance policies have a stated limit. Insurance is not transferable between parties and is usually specific to a person or property. Options are standardized and in most cases can be sold in the marketplace. Actually, Exchange trade options are quite simple. There are just two types of options—the call and the put—the features are fairly straightforward, and they can be utilized effectively under certain situations by both the speculator and the hedger.


PREVIEW

                                                                          

Not a subscriber?

Start A Free Trial


  
  • Creative Edge
  • Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint