From the course: Derivatives Fundamentals

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Introduction to options and their purpose

Introduction to options and their purpose

From the course: Derivatives Fundamentals

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Introduction to options and their purpose

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- [Instructor] Let's look at options. So, what is an option? Simply put, an option contract gives one party the right, but not the obligation to buy or sell an underlying asset at a specific price by or at a specific date. If the party that has this right to buy or sell chooses to exercise their right or option, the counterparty to the contract must deliver. The two basic option types are a call option and a put option. A call option is the option to buy an underlying asset at a specified price in the future, whereas a put option is the option to sell an underlying asset at a specified price in the future. What is the purpose of an option? Well, options can be used for a wide range of hedging and speculating purposes. Since options give the right but not the obligation to exercise, investors who buy options can use these options to speculate while also reducing downside losses. We can also combine options together, combining calls and puts in many different ways to execute unique…

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