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Option

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Dictionary Says

Definition of 'Option'

A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).


Call options give the option to buy at certain price, so the buyer would want the stock to go up.

Put options give the option to sell at a certain price, so the buyer would want the stock to go down.
Investopedia Says

Investopedia explains 'Option'

Options are extremely versatile securities that can be used in many different ways. Traders use options to speculate, which is a relatively risky practice, while hedgers use options to reduce the risk of holding an asset.

In terms of speculation, option buyers and writers have conflicting views regarding the outlook on the performance of an underlying security.

For example, because the option writer will need to provide the underlying shares in the event that the stock's market price will exceed the strike, an option writer that sells a call option believes that the underlying stock's price will drop relative to the option's strike price during the life of the option, as that is how he or she will reap maximum profit.

This is exactly the opposite outlook of the option buyer. The buyer believes that the underlying stock will rise, because if this happens, the buyer will be able to acquire the stock for a lower price and then sell it for a profit.

Related Definitions

  •

    American Option

    An option that can be exercised anytime during its life. The majority of exchange-traded options are American.
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  • Call

    1. The period of time between the opening and closing of some future markets wherein the prices are established through an auction process.2. An option contract giving the owner the ...
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  • Derivative

    A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by ...
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    • Embedded Option

      An option that is an inseparable part of another instrument. Compare this to a normal (or bare) option, which trades separately from the underlying security.
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    • Employee Stock Option - ESO

      A stock option granted to specified employees of a company. ESOs carry the right, but not the obligation, to buy a certain amount of shares in the company at a predetermined price. An ...
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    • European Option

      An option that can only be exercised at the end of its life, at its maturity. European options tend to sometimes trade at a discount to its comparable American option. This is because ...
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    • Index Option

      A financial derivative that gives the holder the right, but not the obligation, to buy or sell a basket of stocks, such as the S&P 500, at an agreed-upon price and before a certain date. ...
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    • Intrinsic Value

      1. The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. ...
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    • Roll Down

      The replacement of an option with a new option that has a lower strike price. The use of a roll down means that the investor does not have to exercise the option. Instead, the investor ...
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    • Leverage

      1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. 2. The amount of debt used to finance a firm's assets. ...
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    • Bermuda Option

      A type of exotic option that can be exercised only on predetermined dates, typically every month. Bermuda options are a combination of American and European options. American options are ...
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    • Option Chain

      A form of quoting options prices through a list of all of the options for a given security. An option chain is simply a listing of all the put and call option strike prices along with ...
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    • Options Contract

      One options contract represents one hundred shares in the underlying stock. The quoted price of an option is per share.
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    • Put

      An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time. The buyer of a put option ...
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    • Spread

      1. The difference between the bid and the ask price of a security or asset. 2. An options position established by purchasing one option and selling another option of the same class but ...
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    • Time Value

      The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract.
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    • Strike Price

      The price at which a specific derivative contract can be exercised. Strike prices is mostly used to describe stock and index options, in which strike prices are fixed in the contract. ...
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    • Writer

      The seller of an option who collects the premium payment from the buyer.
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