What are Options?
An option is defined as the right, not the obligation, to buy (or sell) an asset at a fixed price before a predetermined date.
Let's have a look at that definition and see if we can pick out the component parts:
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The right, not the obligation
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To buy or sell an asset
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At a fixed price
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Before a predetermined date
These component parts have important consequences on the valuation of an option. Remember that the option itself has a value which we will look at after we finish with the definitions.
Before we go ahead and look at the ways in which options are valued, let's consider the words "right not the obligation":