Options are financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and data. Considered as a financial contract, options are also defined as a derivative which draws its value on a set of underlying variables, such as the volatility of the stock on which the option has been written. The two most common types of options are calls and puts. Call options allow the holder to buy the asset at a stated price within a specific timeframe, while Put options allow the holder to sell the asset at a stated price within a specific timeframe. A versatile financial product, US options can be exercised at any time prior to their expiration, while European options can only be exercised on the expiration date.

Three Big Advantage of Buying Options

  • Small upfront capital investment
  • Fully limited risk
  • Unlimited profit potential
  • Note:  These do not apply when you sell options

  • Options can be "very risky"
  • Using options as part of a well-contemplated trading system may be less risky