In banking, options are contracts that give the holder the right but not the obligation to buy or sell an underlying asset at a predetermined price and within a specified period. The underlying asset can be stocks, bonds, currencies, commodities, or other financial instruments.
There are two types of options: call options and put options.
- Call options: A call option gives the holder the right to buy the underlying asset at a predetermined price, known as the strike price, within a specified period. If the market price of the underlying asset rises above the strike price, the holder can exercise the option and buy the asset at a discount.
- Put options: A put option gives the holder the right to sell the underlying asset at the strike price within a specified period. If the market price of the underlying asset falls below the strike price, the holder can exercise the option and sell the asset at a premium.
Options can be traded on exchanges or over-the-counter (OTC) markets. They are used for hedging, speculation, and arbitrage.
Option trading involves risks, and investors should carefully consider their investment objectives, risk tolerance, and financial situation before trading options. It is important to have a good understanding of the underlying asset, the market conditions, and the potential risks and rewards of the option contract.