What is a Stock Option?

A stock option is a financial contract that grants certain rights to its holder and creates specific obligations for its seller. There are two types, calls and puts. A call option provides its holder (buyer) the right to buy the security that underlies the option at a specific price, called the strike price or exercise price, for a set period of time. The call seller, meanwhile, is obligated to sell the option's underlying security at the strike price if the option is exercised. A put option provides its holder with the ability to sell the option's underlying security for a specified price for a specified time period. The put seller is obligated to buy the underlying at the strike price if the option is exercised. 

In the United States, listed equity options are traded on exchanges, and these trades are cleared by The Options Clearing Corporation (OCC). The options market in the U.S. trades millions of put and call option contracts every day, providing investors with a way to manage risk and potentially generate income. Buying and selling options, however, has several important aspects that need to be understood before investors add these assets to their investment plan. At OIC, we have several ways to begin your learning journey, including our Options Basics page and with the disclosure document called Characteristics and Risks of Standardized Options.