What are options?
Options are financial derivative contracts that give the buyer the right to buy or sell an underlying asset at a price and expiry date, which is agreed upon between the buyer and the seller. The buyer will pay a premium – also known as a margin – for each contract. This margin is based on the expiry date of the contract and the strike price, which is the price for buying or selling an underlying asset until the expiry date.
Unlike with futures, investors who purchase options contracts are under no obligation to sell or buy the underlying asset when the contract expires (or if the strike price moves beyond the price range before the expiry). They can simply choose to pay the premium and not exercise their right to buy or sell.
You can buy or sell options if you believe a market’s price will rise or fall. You can purchase an option to buy – known as a call option – if you think the market will rise. If you think the market will fall, you can purchase an option to sell – known as a put option.