(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
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
is the price
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
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."
BILL: So, options
are just like gambling, am I right?
ANNA: For most people. But if you're already in the business
of buying or selling a particular thing, an option can protect you against a bad price movement.
BILL: But options
? I mean, unless a company wants to reward its own executives, or something?
ANNA: Well, you might need options
risk, if you're a fund manager. That way you can focus on long-run