What is an Option?

Answer:
An option is just that, an option. It gives the owner

the option - but not an obligation - to buy or sell a futures, stock, or index contract at a set price for a specific time period such as three months. When the purchasing is desired, the option is called a “call option.” When selling is desired, the option is called a “put option.”

Why would you buy a call or put option? If you believe the underlying investment will rise in value during a particular time period, you
could buy a call option to buy that investment at a set price. If you believe the underlying investment will fall in value, you can buy a
put option to buy at a set price. Either way, if the investments don’t perform as expected, you are not obligated to exercise your option.

For example, if you think a stock will rise in value in a few months, you could purchase the right to buy 100 shares at $150 per share three months from now. You would pay the option writer a premium for this right, say $3 per share. You are paying $300 for the option of buying the investment for $15000 in three months. In three months, if the value of the underlying investment has gone up significantly, say to $200 per share, you can exercise your option to buy at the lower price. You would now have a $20,000 investment yet you would only have paid $15,300 for it.