Options

An option is a financial instrument that defines the terms of a potential (optional!) business or trade in the future. In essence the holder of the option has the right but not the obligation to exercise the option. If exercised the business or trade as defined in the option is executed.

As this general definition would allow for too many variations it would become difficult to create a market for any of them. Therefore if a liquid market is desired options are standardized, e.g. in terms of expiration date, strike price, etc.

All options refer to an underlying security, e.g. shares of a particular company. Generally options can be categorized into buy options - the option is with regards to buying the underlying security - and sell options - the option is for selling the underlying security. If it is a buy option it is typically referred to as a Call option, or short a Call, while the option for selling is called a Put option, or short a Put.

In contrast to options, a future is a binding contract for a future business or trade. It will take place no matter what.