Investors use options contracts for one of two purposes: They are protecting their other investments, an activity called hedging. Or, they are attempting to profit from an asset’s price moves without buying the asset. That’s called speculating.
An option gives you certain rights but not obligations. It’s like putting down a deposit on a house. You’re agreeing to buy that house at a set price within a specific time, but you can walk away if you change your mind (at a cost).
There are two basic types of options:-
A call option gives you the right to buy an asset at a specific price.
A put option gives you the right to sell an asset at a specific price.
Each options contract has specific terms:-
Strike price: The price at which you can buy or sell the asset.
Expiration date: The deadline by which you must use the option.
Premium: The upfront payment for the contract.
The price or value of an option (its premium) changes constantly based on complex mathematical models. The most widely used is the Black-Scholes model, which accounts for the underlying asset’s price moves, time until expiration, and market volatility. You don’t have to calculate this yourself—most trading platforms do it for you.