Meaning of Options and its Terminology & Why People Buy Options?

What is Option?

The options market is the market for buying, selling and writing options contracts.

Options are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a pre-determined price within a fixed period of time. They're also known as "covered calls," because they give you the right to buy shares in a security at a set price within a certain period.

In other words, an option is a contract that gives its holder the right to buy or sell an underlying security within a certain period at a specified price. You can use this right to generate income from speculation on future price movements.

Options are a way to trade stocks and other financial instruments without having to own them. You can use options to speculate on the value of a stock or other asset, or even make a payment using the difference between the strike price and the current market price.

Options are bought or sold in increments called lots, which typically range from 100 shares up to several thousand shares. The number of lots you buy determines how much money you have at risk when you sell your option.

When you buy an options contract, you agree to sell it at a specific price within a certain time frame--usually within a year from now (or sometimes longer). If the price of that asset rises above what's specified in your contract, you'll make money! But if it goes below what's specified in your contract, then your losses will be limited by whatever amount was paid for those options: either $100 or $1 million (depending on whether they're American-style or European-style).

Why Do People Buy Options?

The answer is simple: Options are a form of insurance.

Options give you the right, but not the obligation, to buy or sell a stock at a predetermined price within a certain period. If you don't exercise your option within that period, then it expires and becomes worthless.

But if you do exercise your option and buy or sell the underlying stock at the predetermined price before the expiration date, then you'll make money on your investment in the form of dividends or other payments made by the issuer of the option.

Traders buy options for a variety of reasons. The main reason is that they want to protect their position in the market and ensure that they will not be exposed to any losses. Options can also be used to hedge positions or make a profit on an existing position when there is no other way to do so.

Another reason traders buy options is because they want to make money from the difference between what the price of an asset would have been if the option had not been exercised, and what it was when it was exercised after expiration. 

This difference is called "the premium". When there is no risk associated with exercising an option, this premium becomes much more valuable than if there was risk associated with exercising an option because then someone else may have purchased that same option at lower prices than yours because they wanted out of their position as well!

Call & Put

Call and put options are two types of financial instruments that allow the holder to buy or sell an asset at a predetermined price. The call option gives the owner the right, but not the obligation, to buy a security at a specified price within a specified period; while the put option gives the owner the right, but not the obligation, to sell a security at a specified price within a specified period.

A call option gives the buyer the right, but not the obligation, to buy a security at a specific price within a specific time frame. The buyer has the right to exercise this option only if it is in his or her best interest to do so. If he or she decides not to exercise this option before its expiration date, then he or she forfeits their right to purchase shares at that price.