Understanding Options
Options are financial derivatives that give the buyer the right, but not the obligation, to buy or sell an asset at a specified price on or before a certain date. They are commonly used by traders and investors to hedge risk or speculate on price movements.
Types of Options
- Call Options: Allow the buyer to purchase an asset at a predetermined price.
- Put Options: Give the buyer the right to sell an asset at a specified price.
Examples of Options
For instance, if you buy a call option on a stock at $50 and the stock price rises to $60, you can exercise the option to buy the stock at $50 and sell it at $60, making a profit. On the other hand, if the stock price falls, you can let the option expire.
Case Studies
In 2019, a trader purchased call options on Tesla stock before its earnings report. When the stock price surged after the report, the trader made a substantial profit by exercising the options. However, in another case, a trader lost money on put options due to unforeseen market events.
Statistics on Options Trading
According to the Options Clearing Corporation, the total volume of options traded in 2020 reached over 7 billion contracts, indicating the popularity of options trading among investors.
