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Glossary

Options Contract

An options contract is a financial agreement that gives its buyer the right, but not the obligation, to buy or sell an underlying asset at a set price on or before a specified date.

What Is an Options Contract?

An options contract is a derivative, meaning its value comes from another asset, usually a stock, exchange-traded fund, or market index. It gives the buyer a choice. The buyer can decide whether to go through with the trade, while the seller, also called the writer, must honor the deal if the buyer chooses to exercise it.

There are two basic types. A call option gives the holder the right to buy the underlying asset at a fixed price, called the strike price. A put option gives the holder the right to sell at the strike price. Each contract also has an expiration date, after which the right disappears.

How It Works

The buyer pays the seller a fee called the premium. This premium is the most the buyer can lose. If the market moves against the buyer, for example the stock never rises above a call's strike price, the buyer can let the contract expire worthless. The seller keeps the premium but takes on the risk that the market moves sharply in the other direction.

Many standard US equity options cover 100 shares of the underlying stock per contract. Options can be used for many purposes, including speculation on price direction, hedging an existing stock position, or generating income from premiums.

Why It Matters to Investors

Options can magnify gains and losses relative to the cash invested, and they lose value as expiration approaches, a effect known as time decay. Their prices are also sensitive to changes in volatility and to the underlying price. Investors who consider options should understand intrinsic value, time value, and the Greeks that describe how an option's price responds to market changes. Many brokers require an account approval process before allowing options trading, and assignment risk can arise for sellers at any time before expiration for American-style contracts.

Updated October 17, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Intrinsic Value

Intrinsic value is an estimate of an asset's true worth based on its underlying fundamentals, such as expected cash flows, rather than its current market price.

Option Greeks

The Option Greeks are measures of how sensitive an option's price is to changes in the underlying asset's price, time, volatility, and interest rates.

Call Option

A call option is a contract that gives its buyer the right, but not the obligation, to buy a specified quantity of an underlying asset at a set price before or on a set expiration date.

Put Option

A put option is a contract that gives the buyer the right, but not the obligation, to sell a specified amount of an underlying asset at a set price before or on a set expiration date.

Strike Price

The strike price is the fixed price at which the holder of an option can buy or sell the underlying asset, such as a stock, when the option is exercised.

Expiration Date

The expiration date is the last day on which a derivative contract, such as an option or futures contract, remains valid and can be exercised, after which it becomes void.

Derivative

A derivative is a financial contract whose value depends on, or is derived from, the price of an underlying asset, index, interest rate, or other reference point.