Definition
A contract giving the right, not the obligation, to buy (a call) or sell (a put) 100 shares of a stock at a set strike price before an expiration date. Buyers pay a premium for that right; many options expire worthless, and the premium is the buyer's maximum loss.
Why it matters
Options add leverage and a ticking clock to stock exposure: small moves in the stock become large gains or total losses in the option. They are trading instruments, not a shortcut to long-term investing, and the premium is gone whether or not the bet works out.
Example
A trader pays a $300 premium for a one-month call on a $50 stock with a $55 strike. The stock can rise 10% to $55 and the option still expires worthless, losing the full $300; only above $58 (strike plus premium) does the trade profit at all.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.