Options are one of the more difficult financial instruments to understand.
Therefore, we have created this beginner’s guide to explain what options are,
how they are traded and what benefits and risks they present to the investor.
What is an option?
An option gives you the right, but not the obligation to either buy or sell an asset at a
certain price on a certain date.
An example:
If you have a contract stating that you can buy my car on June 1st at the price of
USD 1,000, you have an option – an option to buy my car. If the value of my car
is higher than USD 1,000 on June 1st, you will profit from buying it because you
can then turn around and sell it for more than USD 1,000. On the other hand, if
the price were less than USD 1,000, you wouldn’t want to buy my car. Since an
option gives you the right but not the obligation to either buy or sell an asset,
you are entitled not to buy my car if the price doesn’t suit you.
