What is the definition of an option in securities trading?

An option in securities trading is defined as a contract that provides the holder with the right, but not the obligation, to buy or sell an underlying asset at a predetermined price, known as the strike price, until a specified expiration date. This definition captures the essence of what an option entails in the context of financial markets.

Choosing a set price (the strike price) and a specified date (the expiration date) are key components that distinguish options from other types of financial agreements. The inherent flexibility allows investors to hedge against risks or speculate on price movements while managing their investment strategies. This structure is essential for various trading strategies, as it allows for varied risk levels and potential profit avenues.

The other options do not accurately reflect the characteristics of an option. The choice mentioning a contract "to buy or sell securities at any time" fails to recognize the crucial aspect of a specific expiration date. The mention of a "guarantee to finalize a trade" does not align with the definition of options, as they are inherently not guarantees but rather provide rights subject to market conditions. Lastly, labeling an option as an "irrevocable agreement to purchase stocks" misrepresents the optional nature of these contracts, since the holder can choose whether to exercise the option based