Options are financial contracts that were originally designed to hedge some type of risk. Today Options are highly risky, speculative investments done between two parties a buyer and a seller.

Options are financial derivatives, being derived of a underlying asset, whether a  Stock, Commodity, or other asset. There is an agreement upon the price of the underlying asset, the maturity (time it takes place), and the premium (cost of the option). In a Call Option the buyer of the option as the ‘option’ to call upon the contract to have the contract take place, known as exercising the option.

The agreed upon price of the option is called the strike price. The date on which the agreement expires is the maturity . The amount of money required to purchase this call option is called the option premium.

Call Options are options in which it gives the buyer the right-to-buy some asset at some price (strike), for some cost (premium).

Buyer thinks the shares of ABC are going up in the near future, and has adopted a long view. The seller of the option thinks the price of ABC Corp. is going down or is going to be stagnate in the near future, and has adopted a short view. The Call premium is $3 ( always quoted per share), and the option contracts are always sold in 100 shares lots. The Buyer of the option gives $300 ( $3 per share X 100 Shares) as the ‘price of the option’.  If the shares of ABC Corp. rise by more than $3 before the maturity date then the buyer can exercise the option.

Case Study: Assume ABC Corp. price = $20 per share, 3 Month option. if the Shares rose by $10 before the maturity, the the buyer could exercise the right-to-buy, and profit $7 per share ($700 in total), after the $3 per share cost. However if the price does not rise, then the buyer isn’t going to exercise the option, and the seller of the call option will profit $300 from the premium.

Put Options are options that gives the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a specified price within a specified time. This is the opposite of a Call option, where the buyer of the option is short, while the seller of the option is long.

Buyer thinks shares of ABC are going down in the future and has adopted a short view. The seller of the option thinks price of ABC Corp. is going up in the future. If the stock declines by more than the buyer has the right to sell ABC Corp. to the Seller at some price; if the stock declines then the buyer can buy the asset at the lower value then sell it to the seller of the option for the higher price.

Case Study: Assume ABC Corp.  price = $20 per share, 3 Month option. If the shares drop to $14 before maturity, then buyer has the right to sell the shares to seller for $20, after buying them for $14, profiting $6. But if the price goes up to $22 per share, then the buyer won’t exercise the option, and the seller has gained $300 in the option premium.

Today Options are used by large financial corporations and small independent farms in hedging pricing risk on certain assets required for daily business activities. This means that if a crop’s price goes down, the farm can still sell the crops at a certain (higher) price, by buying a put option. This gives all businesses certainity in prices when it comes time to sell a commodity.