A contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price.

What Is an Option?

An option is a derived financial agreement which allows its holder to buy or sell an asset without requiring a commitment. Options have a set price, called a strike price, and an expiration date. They can be used in the trading of cryptocurrencies, indexes, exchange-traded funds (ETFs), among others. Rules governing option trading depend on an option’s style.

Basically, there are two option styles; American and European. The difference between the two lies in how holders interact with the instrument between purchase and expiration time. For example, American-styled options give their holders the freedom to buy or sell on or before the expiration date. On the other hand, European-styled options only allow holders to execute their rights on the expiration date.  

In the options space, buy and sell activities are referred to as call and put respectively. A call signal is a sign that an option holder can buy an asset at a predetermined price and time. Put and call option strategies work in opposites of each other. Note that options are traded in the options market. Although these financial instruments have a high level of risk compared to spot trading, they have several advantages.

For instance, they can help investors to efficiently deploy funds consequently, maximizing their returns. Additionally, due to their reduced financial obligation, they can be less risky than futures and other types of financial instruments. Options are highly flexible, allowing for the creation of synthetics, and thus, expanding investment alternatives.

Related Articles