Options are a derivative form of investing and they are based on the underlying asset value, for example, a stock option. The option is the derivative instrument, while the stock is the underlying asset.
An option agreement provides an investor with a possibility (not an obligation) to buy or sell an asset at a certain price until the agreement expiration date. The investor is not obliged to buy or sell the asset if he decides not to do it.
For example, you want to buy a stock for USD 200. However, the current quote fluctuates around USD 250 and doesn’t wish to move down to the target level. In this case, you may sell the put option at the strike of 200 and kill several birds with one stone. This way, you may quietly wait as long as you wish until the price reaches the target level of USD 200. If this doesn’t happen, you will put the whole premium from selling the option in your pocket, receiving the reward of waiting. If we take into account that expirations of American options take place every week, you could make a decent amount of money just waiting for the stock to reach the target level. If, in the end, the stock price moves down, you will get 100 stocks for 1 put option lot at the target price of USD 200.
Options are often used as a safety asset. That was their initial purpose.
Their trading volume grows year after year. It is expected that the roaring 2020 will establish a new record, including due to the fact that options are more often used in speculative strategies.