By: Julio Perez, Fall 2017 IAC Graduate Research Assistant
Investing is defined by options – you have options in how, what when and where you invest, and no two investment portfolios look the same. That being said, why is “options” used as a technical term in investing? Options give you the right (but not obligation) to buy or sell a security at a fixed price within a specific period of time.
Now, why would you make a contract to buy stock at a certain price instead of just doing it when it reaches that price? Options come in two varieties: call options, where you can buy an option at a certain price, and put options, where you can sell the option at a certain price.
Options are more geared towards limiting risk rather than making profit. Risk is limited not only by the opportunity to buy and sell stock exactly when it hits a certain price and before the price spirals out of control, but also because such transactions generally require less capital than equivalent stock transactions.
Options are also bought and sold on separate exchanges from stocks and bonds, with two prominent examples being the Chicago Board Options Exchange and the International Securities Exchange.
Translated: “I have a call option on fruit leather, which means I will buy the contract if the price of fruit leather hits $2.01 by the end of the year.”