Options contracts are used both in speculative investments, in which the option holder believes he/she can secure a price much higher (or lower) than the fair market value of the underlying on the expiration date.
For example, one may purchase a call option to buy corn at a low price, expecting the price of corn to rise significantly by the time the option is exercised.
Like all speculative investing, this is a risky venture.
Other investors use option contracts for a completely different purpose: to hedge against market movements that would cause their other investments to lose money.
An option is part of a class of securities called derivatives, which means these securities derive their value from the worth of an underlying investment.
A contract in which the writer (seller) promises that the contract buyer has the right, but not the obligation, to buy or sell a certain security at a certain price (the strike price) on or before a certain expiration date, or exercise date.
The investors may then buy the corn at the agreed-upon low price and instantly resell it for a tidy profit.
Gives the buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a given date. Buyers of call options bet that a stock will be worth more than the price set by the option (the strike price), plus the price they pay for the option itself.
Buyers of put options bet that the stock's price will drop below the price set by the option.