Glossary · Defined term
Options contract
An options contract gives the buyer the right to buy (call) or sell (put) an asset at a set strike price before expiration.
Last updated Oct 2, 2026
What it means
An options contract gives the buyer the right, but not the obligation, to buy or sell an asset at a set price by a set date. A call option is the right to buy at the strike price; a put option is the right to sell at the strike price. The buyer pays a premium for this right, and the seller collects the premium in exchange for taking on the obligation if the buyer exercises.
Options are versatile tools. Hedgers use puts as insurance against declines, speculators use calls to bet on rallies with limited risk, and income seekers sell options to collect premiums. A standard U.S. equity options contract covers 100 shares, so one contract's premium and payoff are multiplied by 100. Every contract has an expiration date, after which unexercised options expire worthless.
The defining feature of options is leverage with defined risk for the buyer. A small premium can control a large position, and the most a buyer can lose is the premium paid. Sellers face the mirror image: limited profit from the premium against potentially large losses, which is why selling options without a hedge is considered an expert-level strategy.
An example
For illustration, you pay a $3 premium for a call option with a $100 strike price covering 100 shares, costing $300 total. If the stock rises to $110 before expiration, the option is worth at least $10 per share, a large gain on the $300 risked.