What Are Stock Options?
The building blocks of options explained simply
What Is a Stock Option?
A stock option is a contract that gives you the right — but not the obligation — to buy or sell a stock at a specific price by a specific date. You pay a small amount (called the premium) for this right. Options are one of the most flexible tools in investing, allowing you to generate income, hedge risk, or speculate on price movements.
Calls and Puts: The Two Types
There are only two types of options. A call option gives you the right to buy a stock at a set price. A put option gives you the right to sell a stock at a set price. That is the entire foundation. Every options strategy, no matter how complex, is built from these two building blocks.
Why Options Exist
Options serve several purposes. Income investors sell options to collect premium — steady cash flow from stocks they own. Hedgers buy options as insurance — protecting their portfolio from downside moves. Speculators use options for leverage — controlling large positions with a fraction of the capital.
Key Terms
Premium — The price you pay (or receive) for an option contract
Strike Price — The specific price at which you can buy or sell the stock
Expiration Date — The deadline by which the option must be exercised
Contract — One options contract represents 100 shares of stock