What’s an option?

What’s an option?

Marketers use a lot of tools for establishing buyer-seller relationship in their work. One of them is options. In trade marketing, options are most often used to stimulate sales.

Option is an agreement that grants the right to purchase or sell any type of asset at a certain price, over a period of time or on a particular day.

In order to better understand this fairly complex term, let’s look at an example. Imagine that you got some shares for a limited period. It is important to remember that there is always a risk of them falling in price. A standard way to avoid this is creating a protective agreement to limit losses. In this case, probability of the agreement working and the shares value increasing is high.

The second way is to buy options to limit losses. For example, the price of one share is $120. When buying options, we get a guarantee of selling those shares at the same price at any time. With an option price of $5 and share cost increasing to $130, our profit will be $5. If the share price falls, we will sell them at $120, and our losses will be only $5, that is the option cost. In this case, the right to sell shares at a fixed price was used.

What are the option types?

There are only two types of options:

  • put option;
  • call option.

Their key difference lies in what we want to do with the option: buy or sell.

A put option is an option that grants the right to sell an asset at a set price. If you need to protect your assets from falling in price, you should get a put option.

A call option is an option that grants the right to purchase an asset at a set price. If you need to be bearish, then prevent the increase in value with a call option.

The price of exercising a call option, or strike price - is a set price for buying or selling a core asset with a valid option. In turn, the option seller has to sell/buy the according amount of core assets.

Option styles: American, European, Asian

There are three option styles:

  • American option is a type of option contract that the holder can execute at any time;
  • European option is a type of option contract that the holder can execute at a certain point in time;
  • Asian option, or the average price option, is a type of option contract that can be executed at an average price over a certain period of time after the purchase.

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