Options are contracts that give the bearer the right, but not the obligation, to either buy or sell an amount of some underlying asset at a pre-determined price or before the contract expires. Options can be purchased like most other asset classes with brokerage investment accounts.
Options are powerful because they can enhance an individual’s portfolio. They do this through added income, protection, and even leverage. Depending on the situation, there is usually an option scenario appropriate for an investor’s goal. A popular example would be using options as an effective hedge against a declining stock market to limit downside losses. Options can also be used to generate recurring income. Additionally, they are often used for speculative purposes such as wagering on the direction of a stock.
Experts emphasize the following option types:
– European. It can only be executed on the last day of the option term.
– American. It can be executed at any time until the contract expires.
– Quasi-American. In this case, the option holder repays it in set time frames (there is one or a few stages under the contract itself).