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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