What is an option?

Before moving to more complex aspects, let's define, what we are working with.

For instance, suppose that you have an option to buy 100 shares of Nestle at $50 per share before a certain date.

If the stock price rises to $100 before the corresponding date, you could choose to exercise the option and purchase the shares at the lower price of $50, making a profit of $5000 ($50 per share x 100 shares).

However, if price falls, for example, to $25 per share, you can let your option expire, by not using your right, and lose only money for buying the option.

What kinds of options are exist?

Speaking about time, when we could exercise options, they could be divided into two categories :

Additionally, by the way we can use option, they could be divided into two next categories:

We are going to dive into them deeper into further chapters.