An Option is basically a contract between two parties which gives the buyer the right but not the
obligation to buy or sell a certain underlying asset at a specific price on or before a specified date. It is a
derivative financial instrument due to the fact that the price of the option is derived from the value of
the underlying asset.
An investor would mainly use options as a means to hedge his investments as well as for speculation.
While speculating, the investor is basically betting on the movement of a certain security. Because of the
versatility of options, the investor can make money even when the market is down. Hedging is in effect
a means to insure ones investment in the event of an economic downturn.
