What are options?
Today’s financial terminology often appears in everyday life, in economic news. More and more people are trying to understand the principle of the exchange. Therefore, it will not be superfluous to master some concepts. For example, what is an option?
Options and their history
The word "option" comes from the Latin "optio" (optio), which means "choice, the right to choose." In the language of financiers, this is a contract between two subjects, according to which the right to buy or sell a product is given. Moreover, the purchase price (sale) of this product is fixed for a certain period of time, which is very convenient. But for this right, of course, you have to pay.
That is, the object of sale and purchase are not only exchange commodities, securities, stocks, currency, but also the options themselves.
Options appeared in the XVII century. The need for them arose when the number of people willing to purchase a certain product began to exceed the number of goods. So, options were widespread in the Netherlands when trading in tulip bulbs. At that time (as now) it was a very profitable business, the rise in prices was rapid.And buying an option, a person could count on purchasing tulips in the future at a much lower price.
The possibility of acquiring options when trading stocks was introduced in the 20s. XIX century. in England. In its present form, the options market was formed by the beginning of the 60s. Twentieth century.
Types of options
There are options for the purchase of goods (call - Call Option) and sale (Pat - Put Option).
The benefit from the purchase of options is as follows: the option allows you to fix the price. And if the product subsequently rises in price, the transaction is made at a cost at the time of the option purchase.
Thus, the seller may sell the shares more expensive if by the time of sale they have fallen in price. But, as in all financial transactions, there are risks. If the stock has risen, the seller will suffer a loss, fixing a lower value in the option.
For the duration of the options are short-term (valid for several months) and long-term. Short-term - this is American (transactions are made during the entire time from the date of purchase of the option until the expiration of the term) and European (the transaction within a certain specified period).
Types of options
Options are divided into stock and over-the-counter.
The first ones are exchange contracts (contracts), at the conclusion of which both parties make a deal on the terms of the exchange, stipulating only the option premium (that is, the value of the option contract).
OTC options are concluded directly by the parties to the transaction and the conditions are negotiated independently. They are concluded between banks, financial institutions, their clients.
There are also options with a fixed profit, they are called binary. What is their essence, what are binary options? If the option contract has been executed, then the agreed income will necessarily be received. If the execution of the contract has not occurred, then the profit is equal to zero. Binary options are especially prevalent in foreign exchange markets.
Thus, briefly to the question: what is an option, you can answer this way - this is one of the most common financial instruments.