What is the purpose of an option in financial terms?

In financial terms, the main purpose of an option is to provide 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, within a specified timeframe. This creates opportunities for investors to manage risk or speculate on price movements. For instance, a call option gives the holder the right to purchase an asset, while a put option provides the right to sell it. This flexibility allows traders to develop various strategies depending on market conditions, making options a valuable instrument in financial markets.

The other choices do not accurately describe the purpose of an option. Guaranteeing future payments mostly pertains to bond agreements or similar financial instruments rather than options. Investing directly in commodities would involve futures contracts or direct purchase of commodities rather than options. Securing loans against collateral describes the function of a secured loan, which is unrelated to the nature of options. Thus, the definition of an option as the right to buy or sell at a fixed price captures its fundamental purpose in finance.