(FINANCE) a type of financial derivative
; a certificate that gives the owner the right to buy (or sell) a fixed amount of a specific thing for a specific price (the strike price
An option to buy something else is called a call option
; an option to sell something else is called a put option
. An option has a strike price, which is the price at which you are entitled to buy (or sell) the underlying commodity
, or stock, or foreign currency, or whatever.
Options allow the owner to speculate in the possibility that market prices will change in a certain direction, without actually spending the value of the underlying item. For example, suppose WTI crude is $85.75/bbl. In order to make $1000 off of a $0.25 increase in the price, you ordinarily would need to own 4000 bbls of crude, which you can't afford. So, instead, you buy a call option for 4000 bbls with a strike price of $85.75/bbl (i.e., exactly what it is now). This option will cost a tiny amount of money. If the price goes up to $86.00/bbl, you don't own the oil, but your options are now worth $1000 to somebody who wants to buy that oil.
An option with intrinsic value (for example,a call option whose strike price is less than the spot price
) is "in the money." An option with no intrinsic value is "out of the money."