What is an Option Contract?

What is an Option Contract?

There are two kinds of options: calls and puts. When you pick the right direction of a stock, you can make an incredible amount of money by buying a call or put. In its most basic form, if you believe a stock is going to go up, you buy a call option. If you believe a stock is going to go down, you buy a put option.

Simply stated, an option contract gives an investor the right, but not the obligation, to buy (call) or sell (put) 100 shares of its underlying stock at a specified price by the close of trading on its expiration date.

If an option buyer chooses to buy or sell the underlying stock at the price specified, or “strike” price, it is called “exercising” the contract. Call options give you the right to buy the underlying stock at its strike price. Put options give you the right to sell the underlying stock at its strike price.