Options are contracts that give the owner the right, but not the obligation, to buy or sell an asset at a certain price, either before or on a specific date and time. The price at which the option's owner can buy or sell the asset is called the "strike price." Traders and investors use options to generate income, to hedge against risk, or to speculate. An option is a derivative because it derives its value from the asset that underlies it. The underlying asset can be stocks, bonds, commodities, or currencies. An option to buy an asset is called a "call option," and an option to sell an asset is referred to as a "put option." For example, suppose you bought a call option for 100 shares of Company A's stock at US$10.00 per share with an expiration date of March 31. You would have purchased the option to buy 100 shares of Company A on or before March 31.

There are two basic types of options you can buy: calls and puts. When you buy a call option, you are purchasing the right to buy the asset on or before a specific date and time, and you're hoping the price rises. When you buy a put, you are purchasing the right to sell the asset and hoping the price drops. For example, if you buy a call in 100 shares of Company B stock at US$10.00 per share that expires on December 31, you have the right to purchase those stocks at that rate—no matter what the actual price ends up being. You can profit off this option by exercising your right to buy the 100 shares and then sell them right away. If, for instance, the price of Company B's stock rises from US$10.00 per share to US$13.00 per share by December 15, you have the potential of earning US$3.00 per share. If the price drops, all you lose is the price you paid for the option. If you bought a put, you'd hope the price fell, and you'd profit from that difference.

Options are different from stocks in that when you buy options, you're buying the right to buy or sell an asset. You can buy options on several different kinds of assets, such as stocks, bonds, currencies, and commodities. When you buy stocks, you own a piece of the company that issued the stock. For example, if you bought 100 shares of Amazon stock, you would own 100 of the over 500 million shares of Amazon stock that are on the market. When you buy an option, you aren't buying the stock itself. You're only securing the right to purchase or sell a certain number of shares of that company on or before a specific date and time. You could, for example, purchase the option to buy 100 shares of Amazon stock at US$3,286.00 by April 30. If the price goes up by the end of April, you could exercise your option and realize a profit.