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Investing

What is an option?

An option is an agreement that a commodity or stock will be available for purchase at a set date.

An option is a type of derivative in which both of the people who are making the agreement choose a point in time when there can be a trade in the future. This means that when the date agreed to for the option comes around, the people will make a decision as to whether or not they will actually do the trade that was agreed to.

If the trade is not completed at that point in time, then there are usually a few different options available. The most obvious option is just to decide not to go through with the trade at all in the future. The second possibility is to make a new options agreement. Now, options do not have to stay in the same hands for the full period of time. For example, if somebody has options for one particular type of commodity and they do not think that the final price will be high enough for them to make money, they might decide to sell the option.

Selling the option does not mean that you are selling anything tangible. Instead, it means that you are selling the opportunity to make a commodities purchase in the future. Selling options is a much better idea than holding on to them if you think you will not be making the purchase. The price of options depends a lot on what the commodities are going to end up looking like in the future. Therefore, if you think that the commodities will be purchased for a low price in the future, then you will probably be able to sell the option at a higher price now.

Options do not have to be sold based on actual commodities. If you would rather sell options based on stocks or bonds, that is also possible. In fact, there are usually rather large markets built around stock and bond options.

Call options are slightly different than regular options. For example, the call option means that there is initially an agreement to buy a particular stock or commodity at some point in the future. If the price of the commodity is lower than that agreed price, then the seller can “call”, which means that the buyer has to pay the agreed-to premium.