What is “Option” meaning?

An option is a type of financial contract that gives the buyer the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a predetermined price before a specific expiration date. Options are commonly used in stock markets, but they can apply to other types of assets like commodities, currencies, and bonds.

Example

“She purchased a call option on the stock, which allowed her to buy shares at a lower price than the current market value if the stock's price increased.”

How is “Option” used in business?

In business and investment, options are often used for hedging or speculative purposes. Companies and traders use options to protect themselves from unfavorable price movements or to bet on price changes in the underlying asset. Understanding how to use options effectively can help in managing risk and enhancing returns.

Pro Tip

Before trading options, it's crucial to understand the risks involved, as options can result in significant losses if not managed carefully. Start with simple strategies before exploring more complex ones.

Related Terms

Call Option, Put Option, Derivatives, Hedging