An option is a kind of derivative contracts with clear terms and properties that allows the buyer to buy/sell an underlying asset at a particular date in the future at the established price.
When it comes to option contracts it’s necessary to take into account their main features:
– price, called premium
– expiration date
– strike price
Options can be divided into 2 types: the call option that establishes the right to buy the option and the put that implies its selling.
Option contracts can be executed by 2 parties of the transaction. The first writes the option contract, collecting the premium and is obliged to execute it in case the buyer exercises his right. The second side buys the contract, paying the premium and can use his right to exercise the contract if desired.
So, an option is the flexible financial instrument since it’s possible to manage risks and profit potential by using different options strategies.