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What Is Option (In Finance)?


In finance, an option is a derivative financial instrument that establishes a contract between two parties to buy or sell an asset at a set price before a given date. The option depends on some other assets for its value as it gets value from the stock or the index. For this reason, options are also called derivatives. Options are essentially securities and provide the right to the buyers not the obligation to engage in some specific transaction on the asset, while the seller gets the obligation to fulfill the transaction requested by the buyer.



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The holder is not bound to sell. If the holder does not sells the option on a particular date, the price of the option becomes zero and the holder faces total loss of the price, which has been paid for the option. The price of an option derives from the difference between the reference price and the value of the underlying asset (commonly a stock, a bond, a currency or a futures contract) plus a premium based on the time remaining until the expiration of the option.

There are two types of option available in the market. These are called Call and Put.

An Option which conveys the right to buy something is called a call

An option which conveys the right to sell is called a put


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