Options are a form of derivative financial instrument in which two parties contractually agree to transact an asset, at a specified price before a future date. They are most commonly used in the equity or stock market but are also found in futures, commodity and forex markets.

Options give their owners the right, but no obligation, to either buy or sell an asset at the exercise price but the owner is not obliged to exercise (buy or sell) the option. When an option reaches its expiration date without being exercised, it is rendered useless with no value.

Applying for options will depend on the nature of the option:

  • a foreign exchange option would generally be organised through a bank
  • options over shares and equities would be organised through a stockbroker
  • commodity options would be arranged through a commodity broker.

Options generally need to be paid for at the time of purchase. The option provider will generally not require detailed knowledge of the option purchaser’s financial information; if the option-holder is unable to meet the cost of acquiring the asset under the option, the option simply lapses and there is nothing further to pay. The business would have ‘lost’ the cost of the option.

Options require little in the way of maintenance. When the specified date arrives, the option holder has the choice of exercising the option and buying the goods at the agreed price; or allowing the option to lapse, at which point, it becomes valueless.

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