Options

Options are financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price within a certain time period. This flexibility distinguishes options from futures, where both parties are obligated to complete the transaction. There are two types of options. Call options give the holder the right to buy an asset at a specified price (the strike price) before the option expires. Put options give the holder the right to sell at the strike price. Option buyers pay a premium for these rights; option sellers (writers) receive the premium and take on the corresponding obligations. Options serve various purposes. Investors use them to hedge existing positions - buying puts on stocks they own to protect against price declines. Speculators use options to bet on price movements with limited capital at risk. Income investors sell covered calls on stocks they own to generate additional income. Option pricing depends on several factors. The relationship between the strike price and current market price is crucial. Time until expiration matters because more time means more opportunity for favorable price movement. Volatility increases option values because greater price swings increase the chance of profitable exercise. Options can be complex and are not suitable for all investors. The leverage they provide can lead to significant losses, and options can expire worthless, resulting in a total loss of the premium paid. The vast majority of options are never exercised; instead, they're either sold before expiration or expire worthless. Understanding options is valuable even for investors who don't trade them. Options activity can signal market sentiment, and options strategies are widely used in professional portfolio management. The options market has grown enormously, with trillions of dollars in notional value trading daily.