Options are contracts that give the buyer the right but not the obligation to buy or sell an underlying stock at a specified strike price on or before a specified date. The seller incurs a corresponding obligation to fulfill the transaction, which means that they must buy or sell the underlying stock if the owner elects to exercise the option, prior to the options expiration date. The buyer pays a premium to the seller for this right.
Options which give the buyer the right to buy a stock at a given price are called "calls" and options which give the buyer the right to sell a stock at a given price are called "puts". Both calls and puts are commonly traded.
Options are typically thought of as a higher risk type of investment that only very sophisticated traders should consider using; however, this is not necessarily the case. To trade options you need to open what’s called a “margin account” with a broker. And while it is true that you must be a little more financially able to open up such an account (usually a $5,000 minimum), there are many options strategies that are very low risk. Some are simple, some are relatively complex, and some options strategies are used to provide income on an ongoing basis.
Options provide very high leverage and as long as you do not abuse that leverage, trading options properly can be less risky than trading the underlying securities directly.
Options Trading Articles
To learn more about options trading, check out these free articles: