An option is a financial derivative that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date.
Here is an example:
You plan to go on a holiday for a while before you graduate next year, buy a car and take a road trip.
Recently, you found a car that you really like, but you’re worried that the price may drop in a year if you buy it now. Conversely, if you wait and buy it in a year, you’re concerned that the price might go up. In this situation, you negotiate with the car dealership and pay a $10,000 deposit.
After one year, you have the right to buy the car at the agreed price, even if the price has gone up. If the price of the car drops, you do not have to buy it, and of course, you can not get the $10,000 deposit back.
The $10,000 is an option you bought for yourself.
An option contract is different from a futures contract. With a forward contract, you must use the price of the car in one year, while a futures contract is a contract that must be delivered or liquidated at the end. An option, on the other hand, only gives the option contract holder the right. If the price of the car drops too much, you can cancel the contract. You have the right, but not the obligation;
Therefore, options give you a right to choose.
Options are a common financial instrument that can be found on all major trading platforms.
The Tiger trade app offers a variety of options, such as SPX index options and NDX options.
It should be noted that options are also divided into European and American options. European options are stricter: they can only be exercised on the expiration date. American options are looser: they can be exercised on the expiration date and at any time before.
If you want to learn more about options, click here: Lesson 1: What is an Option?-Tiger Options Tour For Beginners
