When you buy an option, you buy the right to trade in the market at a fixed price on a specific date before the option expires. In this respect, options and futures are similar-but unlike futures, if you don't want to trade, you have no obligation to trade.
For example, suppose a trader has an option contract and can buy gold at 1300 next week.
If the price of gold rises to 1325 USD, traders can exercise this option and buy at 1300 USD, which is 25 USD lower than the current market price. If the price of gold is lower than 1275, traders do not need to buy at 1300. But if you don't trade, the trader will lose the premium paid for buying this option.
Extended data:
In option trading, the rights and obligations of buyers and sellers are different, which makes them face different risk situations. For option traders, both buyers and sellers are faced with the risk of adverse changes in royalties. This is the same as futures, that is, within the scope of commission, buy low and sell high, and you can make a profit by closing your position. On the other hand, it is a loss. Different from futures, the risk bottom line of option bulls has been determined and paid, and its risk is controlled within the premium range.
The risk of option short position is the same as that of future positions. Because the premium received by the option seller can provide corresponding guarantee, it can offset some losses of the option seller when the price changes adversely. Although the risk of the option buyer is limited, its loss ratio may be 100%, and the limited losses add up to greater losses.
Option sellers can get royalties. Once the price changes adversely or the volatility rises sharply, although the futures price cannot fall to zero or rise indefinitely, from the perspective of fund management, the loss at this time is equivalent to "infinity" for many traders. Therefore, investors must fully and objectively understand the risks of option trading before investing in options.
Baidu Encyclopedia-Options