Search Dictionary

Definition of 'Underlying'

The underlying of an option is the asset that the option is based on. For example, if you have a call option on Apple stock, the underlying is Apple stock. The underlying can be a stock, a bond, a commodity, or a currency.

The underlying is important because it determines the value of the option. The price of the option will go up if the price of the underlying goes up, and it will go down if the price of the underlying goes down.

The underlying is also important because it determines the risk of the option. The more volatile the underlying, the more risky the option.

When you trade an option, you are not actually trading the underlying asset. You are trading the right to buy or sell the underlying asset at a certain price. This is why options are often called derivatives.

Options are a complex financial instrument, and it is important to understand the underlying before you trade options.

Do you have a trading or investing definition for our dictionary? Click the Create Definition link to add your own definition. You will earn 150 bonus reputation points for each definition that is accepted.

Is this definition wrong? Let us know by posting to the forum and we will correct it.