Glossary
Options Contract
An options contract is an agreement giving its buyer the right, but not the obligation, to buy (a call) or sell (a put) an asset at a set price before a set expiration date.
Options are derivatives — their value derives from an underlying stock or index — and they expire, so unlike a stock, an option can lose its entire value simply through the passage of time. Sellers of options take on obligations and can face losses far exceeding the premium collected.
Why it matters in practice
Options have legitimate uses (hedging concentrated positions, employer-granted stock options) and a large speculative culture around short-term trading, where most retail buyers of quickly expiring options lose money. The leverage that makes options exciting makes outcomes fast and extreme in both directions — a different activity from long-term investing, and prudently kept separate from money with a job to do.
Related terms: Stock · Volatility · Liquidity · Risk Tolerance