Option is a type of contract in which a trader (who buys the Option) has the right to purchase or sell the assets, but not the obligation, at a fixed price until the expiration of the contract. Options are traded in a lot of 100 each.
There are two common types of options: Call Options and Put Options.
Call Options: Call options provide the opportunity for a buyer to buy a security (no obligation) at the strike price as mentioned in the contract. Options traders buy Call Options when they predict that the price of a security will go up and sell the Call Options if they assume the price will go down.
Put Options: Put options provide the opportunity for a buyer to sell a security (no obligation) at the strike price as mentioned in the contract. Options traders buy Put Options when they predict that the price of a security will go down and sell the Put Options if they predict the price will go up.
Options is an excellent asset class to protect the wealth, such as retirement savings, significant long term stock portfolio etc. For example, if an Investor buys 1000 stocks of Tesla, it can buy 10 Put options with the set strike price to protect the 1000 Tesla stocks from unexpected market fluctuations. This strategy is also referred to as Covered Call. In another scenario, if a trader wants to book profit on its stock portfolio and re-enter into the stock at a lower price, a Call Option at lower strike price can be bought to have the option to buy the stock back at a lower price.
Options trading has higher inherent risks as compared to the underlying stock or instrument. Some Option types and strategies have lower risk than some other. However, understanding the risk in Options and how to manage the control of this risk is very critical prior to initiating Options trading.