Options are financial derivatives that grant you the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a predetermined price (strike price) before or at the expiration date.
The most common type of option is a stock option. This security gives the holder the right, but not the obligation, to buy or sell a specific number of shares (usually 100) of a certain stock at a specified price (strike price) before a specified date (expiration date, typically three, six, or nine months).
Options are highly sensitive to market volatility, which can lead to rapid gains or losses.
Options allow for significant leverage, meaning small price movements in the underlying asset can result in large percentage changes in the value of the option. Buying call options can provide substantial returns if the underlying asset appreciates, while the maximum loss is limited to the premium paid.
Options have an expiration date, after which they become worthless if not exercised.
An option writer initiates an option contract through a brokerage firm, committing to either buy or sell a specified asset at a fixed striking price. In return, the option writer receives an option premium—the price of the option itself — for being prepared to fulfill the contract at the option purchaser’s discretion.
The option writer is the party that creates the option contract and sells it to the option holder. You are the options writer if you sell an option. The option writer is responsible for fulfilling the contract.