Tutorial
Added on: November
30th , 2006
An Option
is a contractual right given to an individual allowing
him to buy or sell an underlying asset (common stock,
derivatives, etc) at a specific price on or before
a certain date. Options are similar to stocks and
bonds in that they are all securities that have
strict defined terms and characteristics.
Take a real life example. Imagine
you want to purchase this piece of jewellery for
$50,000 but you do not have the cash upfront. However,
6 months later, you will have enough cash to afford
the jewellery. So you make a deal with the owner,
giving you the option of purchasing this piece of
jewellery for $50,000 in exactly 6 months from now.
However, to give you the right or this "Option",
the owner charges you $2500. From here, you stand
to either gain from the transaction or lose from
it.
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