Options are contracts giving the purchaser the right to buy or sell a security, such as stocks, at a fixed price within a specific period of time.

Since the option gives the buyer a right and the seller an obligation, the buyer has received something of value and must provide the seller with a fee called an option premium.

For the option purchaser (also called the holder), the option:

• offers the right (but imposes no obligation),
  • to buy (call option) or sell (put option)
  • a specific quantity (e.g. 1 contract= 100 shares)
  • of a given financial underlying (e.g. shares)
  • at an agreed price (exercise or strike price), or calculable value. on one or more call dates
• in exchange for a premium (option price).

The option seller (option writer) has an obligation to fulfill the contract if the option holder exercises the option. In return, the option seller receives the option price or premium.
The risk for the option holder is limited: he cannot lose more than the premium paid as he can abandon the option. The potential gain is theoretically unlimited.

Continue learning more about options by reading the articles below.