A financial instrument that derives its value from an underlying security, such as a stock.
Options are time sensitive products which offers the choice to buy or sell the underlying asset, depending upon the type.
The two types are:
- Calls - which give the choice to buy at a certain price.
- Put - which gives the choice to sell at a certain price.
Each option has a specific end date by which the owner has to exercise it, or it expires worthless.
Options are often used as a hedge against price moves, especially with commodities. Companies such as airlines use options to protect against the volatility in the oil markets.
Those holding options have the right but not the obligation to do something prior to expiration.