Financial Terms / O - P / Options

Options

Options are financial derivatives (they derive their value from the underlying asset) that give the buyer the right but not the obligation to buy or sell the underlying asset at a predetermined price within a specified period.

In financial derivatives like futures, the buyer of the future has an obligation to buy the underlying asset. However, in options, you have the option to buy the underlying or give up on the premium paid. Options are used to either increase the leverage of a portfolio or to hedge the portfolio against downside risks.