Investment basics: what is an option?
In previous episodes, we covered the very basics. But now I'd like to take a moment to digress to the "taller girl" topic, which is options. Thanks to @xenino for the suggestion. And don't worry, we'll come back to the biggest basics again.
What's an option?
An option(Important English term: Stock option) is a contract. That's how simple it is 😇
As I wrote in the introduction - we're getting into slightly more complicated waters here. An option is a financial derivative. That is, an instrument that allows us to perform an operation. In this case, to "guarantee" some right to operate on a security in the future. Ugh, that's pretty skeletal, huh? 😂
Let's put it another way - they are derivatives, i.e. their value is based on or derived from the value of the underlying security or asset. An option is essentially a contract that creates an agreement between two parties to sell or buy a stock at some point in the future at a set price, known as the strike…
Traders can use short selling as speculation, and investors or portfolio managers can use it as a hedge against the downside risk of a long position in the same or a related security. So-called hedging.