In finance,
an option is a contract which gives the buyer the right, but not the obligation,
to buy or sell an underlying asset at a specified price prior to or on a specified date, known as the "expiry date". An option contract typically requires an upfront payment for the option, called the premium.
A
call option, also referred to as a "call" in finance jargon, gives the buyer the right to buy the underlying asset at an agreed-upon price on a specific date or within a specified period of time.
A
put option, also referred to as a "put", gives the buyer the right to sell the underlying asset at an agreed-upon price on a specific date or within a specified period of time.
Calls give the right to buy, puts give the right to sell
The important characteristic of options contracts is that they give the right-
not the obligation- to buy or sell an asset at some agreed upon price on or before the option's contract expiration date. The option holder can simply walk away from the option to buy or sell if she or he decides it is no longer in their best interest.
Options are another asset class, and when used correctly, they offer many advantages that trading stocks and ETFs alone cannot (namely the ability to decide not to exercise the option if the value of the underlying asset being bought or sold changes significantly (in the wrong direction) for the option holder before the expiry date, for instance).
Options are different from
futures contracts in that option contracts
give the right to buy or sell on or before some date, while futures contracts
represent an obligation to buy or sell on some date.
With options, financial traders can lock in future gains if an asset value is expected to (and does) rise in value above their call price, and conversely can stem future losses if an asset value is expected to (and does) drop in value below their put price.
References:
https://investinganswers.com/financial-dictionary/optionsderivatives/option-2049
https://www.fool.com/investing/options/options-the-basics.aspx
