Option
An option is a contract giving the buyer the right, but not the obligation, to buy or sell an asset at a set price by a set date.
Options are derivatives: their value depends on an underlying asset such as a stock, ETF or index. There are two basic types. A call option gives the right to buy, and a put option gives the right to sell, at the strike price until the expiration date.
The buyer pays a price called the premium to the seller, or writer. The buyer's maximum loss is that premium. The seller collects the premium but takes on the obligation to buy or sell if the buyer exercises, which can lead to large losses.
In the US, a standard stock option contract covers 100 shares, and listed options are cleared by the Options Clearing Corporation. Investors use options to speculate with limited capital, to hedge existing positions or to generate income. Brokers require approval levels before clients can trade them because the risks can be significant.
Example: a call option priced at $2.00 costs $200 for one contract ($2.00 x 100 shares).