Stock options are financial contracts that give the holder the right, but not the obligation, to buy or sell a specific stock at a predetermined price (the strike price) within a set time frame.
There are two main types of stock options:
- Call Options – Give the holder the right to buy a stock at the strike price before the option expires. Investors buy call options when they expect the stock price to rise.
- Put Options – Give the holder the right to sell a stock at the strike price before expiration. Investors buy put options when they expect the stock price to decline.
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