While many investors may believe that options are a product of recent financial innovation, options were, in fact, conceived thousands of years ago. Some market historians trace the origins of options as far back as ancient Greece and the philosopher Thales. Today, thousands of standardized options contracts on individual stocks, stock indexes, government bonds, currencies, precious metals, and futures contracts trade at some 57 exchanges in 27 countries throughout the world.
Options belong to a broad category of securities known as derivatives or contingent claims.
A derivative is a contract or agreement whose value is derived from or contingent upon the value of a related asset that is referred to as the underlying asset. It is important to note that the owner of an option can also choose not to exercise the option and to let it expire worthless. So by exercising, the owner benefits from a favorable move in the price of the underlying asset, and by not exercising, the owner does not suffer the loss that results from an unfavorable move. In contrast, the seller or writer of an option is always obligated to fulfill the terms of the contract if the owner exercises it. They will be defined below.