Financial Options
A financial option is a contract that guarantees a buyer the right, but not
the obligation, to purchase an underlying asset for an agreed-upon price at a
specific date. The option enables the buyer to control more of the asset with
less risk; a buyer cannot lose more than their initial investment. But since
options are time sensitive, an option can lose value as it moves closer to
expiration day.
There are many types of financial assets available through options:
Stock option: The contract is to buy or sell a specific stock at a specific
date for a set price. While stock can be purchased in any increment, options
are sold in contracts. The contracts control 100 shares of stock. An investor
with 10 contracts controls 1,000 shares of stock for the time specified.
Index option: The underlying asset in this transaction is not shares of a
company, but an underlying dollar value equal to the index level multiplied
by $100.
Bond option: The contract is to buy or sell a specific bond at a certain date
for a predetermined price.
Interest rate option: These are European style, cash-settled options on the
yield of U.S. Treasury securities. They are available on short-, medium- and
long-term rates.
Currency option: The contract grants the holder to buy or sell currency at a
specific date for a specific rate. Currency options are one of the ways to
hedge against volatility in the exchange rates.
Real estate option: This gives you control of a piece of real estate without
buying the property. The exclusive right means no one can buy or sell during
the term of the option. If the seller sells the property while you have the
option, you are entitled to any money the seller receives over the price you
agreed upon.
Types of Exchange Traded Options
Types of Financial Options
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