I assumed that one either invests in a stock and becomes an "owner" of some sort or just covers a debt to do that but I have read that people can also buy "options" in the capital market, yet I didn't find any succinct explanation of what an "option" is, in any plausible legal context. Perhaps buying the legal right to do X or Y in a certain situation (option)?
Perhaps buying the legal right to do X or Y in a certain situation (option)?
Yes. According to this source:
A stock option gives an investor the right, but not the obligation, to buy or sell a stock at an agreed-upon price and date.
Essentially, the option is a contract, an agreement between two parties to sell/buy the stock; the option contract sets the date of the transaction (usually a few months into the future) and the price.
When a contract is written, it determines the price that the underlying stock must reach in order to be "in the money" [i.e. its value], known as the strike price.
The strike price determines whether an option should be exercised [i.e. buy or sell]
Yes an "option" in the common vernacular is an option contract in which the buyer has the right (but not the obligation) to buy (for a call option) or sell (for a put) some financial instrument, like stocks or commodity futures, at a fixed price. The seller typically receives a "premium" upfront in exchange for the optionality.
The actual terms of the contract can vary depending on the type of option, but those terms are all spelled out in the contract.
Some (not all) of the common items that can vary are:
- When the option can be exercised
- What is the actual underlying instrument
- Conditions under which the contract is invalid
Options can either be bought and sold on an exchange, in which case the exchange (or a clearing house) handles the contract creation and execution, or "over-the-counter" in which two parties define their own terms and handle contract creation and execution.