Glossary
Option
A contract that gives the holder the right, but not the obligation, to buy or sell an asset at a set price before a set date.
An option is a contract that gives its buyer the right, but not the obligation, to buy or sell an underlying asset at a fixed price, the strike price, on or before a set expiration date. The buyer pays the seller a price for that right, called the premium. A call is the right to buy; a put is the right to sell. Options let investors bet on direction or volatility with limited capital, hedge existing holdings, or earn income by selling the rights to others.
How a listed stock option works
In the US, one standard equity option contract usually covers 100 shares, so a quoted premium of $2.20 costs $220 per contract. All listed options are cleared by the Options Clearing Corporation, which stands between buyers and sellers. Most US stock options are American-style and can be exercised any time before expiration; many index options, such as those on the S&P 500, are European-style and can be exercised only at expiration. Standard monthly options expire on the third Friday of the month, with many weekly expirations in between.
Buyers and sellers
Option buyers have limited risk, the premium paid, and either unlimited (calls) or large (puts) potential gain. Sellers collect the premium and take on the obligation: if assigned, a call seller must deliver the shares and a put seller must buy them. US brokers must approve an account for options before it can trade them, and they deliver the OCC's disclosure document explaining the risks.