By Swastik Tiwari
In finance, an option is a financial derivative that represents a contract sold by one party (option writer) to another party (option holder), which gives the buyer the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price, on or before a specified date. The seller has the corresponding obligation to fulfill the transaction – that is to sell or buy – if the option holder “exercises” the option. The buyer pays a premium to the seller for this right. Call options give the option to buy at a certain price, so the buyer would want the underlying asset to go up in price. Put options give the option to sell at a certain price, so the buyer would want the underlying asset or instrument to go down in price. Speculators use options to take leveraged speculative bets on the underlying, while hedgers use options to reduce the risk of holding an asset.
There are currently 12 options markets in the United States, run by Nasdaq OMX Group, BATS Global Markets, Deutsche Boerse’s ISE unit, TMX Group’s BOX Options Exchange, Miami International Holdings Inc., Intercontinental Exchange Inc.’s NYSE unit, and CBOE Holdings Inc. Equity options are becoming increasingly popular with both retail and institutional investors.