What Are Options?

An option is a contract that gives you the right, but not the obligation, to buy or sell an underlying asset (usually 100 shares of stock) at a fixed price by a fixed date.

The two contract types

• Call option — right to buy the underlying at the strike price.
• Put option — right to sell the underlying at the strike price.

Every option trade has two sides: a buyer (long the option) and a seller (short / writer). The buyer pays a premium; the seller receives that premium and takes on the obligation if the option is exercised.

Key contract terms

• Underlying — the stock, ETF, or index the option is based on.
• Strike price — the fixed buy/sell price in the contract.
• Expiration — last day the option can be exercised (or auto-settled for cash-settled products).
• Premium — the market price of the option (what you pay or receive).
• Multiplier — typically 100 for U.S. equity options (premium × 100 = dollars per contract).

Why traders use options

• Directional bets with defined risk — e.g. buy a call instead of 100 shares.
• Income — sell premium (covered calls, cash-secured puts, credit spreads).
• Hedging — protective puts or collars on stock you own.
• Volatility views — straddles and strangles bet on big or small moves.

Options are not free money

Time decay, implied volatility changes, and wrong direction can wipe out premium. Short options can carry large or unlimited risk. Always model trades with a payoff calculator before you place them.

Next: Calls and puts in depth · Payoffs and breakevens