Explanation: It is an agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period.
Also Known as: Call
Example: If you believe that a certain stock or commodity’s price is expected to rise after some time, say in the next three months, you can buy a call for that day today. If the price crosses the price at which you bought the call you end up making money, if not then you lose nothing… Why? Because you had the right… but not the obligation to exercise the same, so you simply do not exercise the option.
Another advantage with such instruments is that you can get larger exposure by paying a smaller amount, as you have to pay only the option premium and not the entire transaction amount while entering into a contract.
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