What is option? and how does it works?

i know the difference between what is a stock, mutual funds, bonds, cd, etc. but what is option? and how does it works? it is more risky than stocks? is it that u borrow $$$ to make money?

Answers:
Options are puts and calls. You buy a call when you expect the price of the stock to go up. You buy puts with you think the price will go down.

A call is a request to purchase a security (stock for example) with the expectation that to make money, the stock will go up in value and then be sold.

A put is a request to BORROW a security with the expectation that to make money, the stock will go down and you can then return the borrowed stock and make a profit.

Here's out a put works (just an example).
You BORROW 100 shares of a stock that is selling $10 per share and sell all of them. You then pocket $1000 (100 shares x $10).

You then wait 3 days and, lucky you, the stock goes down from $10 to $5. So you take your $1000 and you buy back 100 shares. But this only cost you $500 (100 shares x $5).

You then have $500 in cash and 500 shares. You give your 500 shares that you borrowed back to the person/company that you borrowed them from and you bank the $500.

You actually MADE MONEY by the stock value going down.
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Options are called derivative securities. There are two types of options, Call options and Put options They basically give you the option of selling or buying a security. A Call option gives you the right but not oligation to buy a security (stocks, commodities, etc) at a fixed price within a certain time period.

So lets say, a stock is currently trading at $20. You think it might go up to $28. So you buy a call option with an exercise (the price of the stock at the time you buy the option) price of $20. This means that if that stock does go up to $28, you will have the option of buying that stock price for $20, netting $8 profit.

However, if the stock drops below $20, you will choose to not exercise that option, and you will only lose that money that you paid for the option (premium).

Put options work in the same manner, they give you the right to sell a stock at a fixed price within a certain time period.

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