An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying security at a specific price on or before a certain date. Options are considered derivatives as their price is derived from one or more underlying securities. Options involve two parties: the buyer and the seller. The parties buy and sell the option, not the underlying security.
There are two general types of options: the call and the put. Let's look at them in detail:
Call: This gives the holder of the option the right to buy an underlying security at a certain price within a specific period of time. They are similar to having a long position on a stock. The buyer of a call is hoping that the value of the underlying security will increase substantially before the expiration of the option and, therefore, they can buy the security at a discount from the future value.
Put: This gives the option holder the right to sell an underlying security at a certain price within...