What is an option?
It is a financial instrument giving the right, but not the obligation, to buy or sell an asset, such as a share or currency, for a pre-determined price at a fixed future date. Options are a type of 'derivative'.
Where have you heard about options?
Periods of market volatility are sometimes blamed on trading in options and other derivatives. Others say, however, that these instruments - so named because they are 'derived' from an underlying asset (e.g. a share) actually work to smooth market movements by allowing traders to hedge their positions.
What you need to know about options...
An option is a future opportunity to buy shares priced today. If the price is lower than it is today, the option can be allowed to expire. That means the investor or trader loses only the original cost of the option. If it is higher, the option-holder profits.
In some businesses, options are used to give managers incentives to work harder and drive up the share price.
Options and other derivatives are not for the small investor and should be left to the professionals.