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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