A privilege sold by one party to another that offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security at an agreed-upon price during a certain period of time or on a specific date.
Options are formally referred to as Options contracts.
Options are traded for almost all financial instruments, including Stocks, Futures, and currencies. Many Options are traded on public exchanges, but a significant volume of Options trading, especially for the Forex market, takes place over the counter (OTC).
Options can be used for a wide range of purposes, but generally, they are most commonly used in two ways.
First, a party can purchase a put or call Option as a tool for outright speculation, that is, buying an Option in the hope that the underlying instrument will rise or fall dramatically in price.
Secondly, a party may purchase an Option as a hedge in order to protect from losses or protect unrealised profits in the underlying instrument.
Option buyers take a limited risk (the cost of the Option, or its premium) with the potential for nearly unlimited profit.
Sellers of Options have a different strategy and are taking unlimited risks for the sake of a limited profit, unless they are selling covered Options, in which a position in the underlying instrument guarantees against a loss in the Option premium (but does not guarantee against a loss in the underlying instrument).