Options are contracts used by investors to take a speculative position – or a hedge – based on expected future price movements of the underlying securities.

An option is a contract which can be exercised if the price of an underlying security moves favorably. An option will be written or sold short by one investor and bought by another. It will name the strike price at which the security can be bought or sold before the expiration of the contract.

One of the parties involved can exercise the right in the contract, and the other must fulfill their request. If the option is not exercised before its expiration, it expires worthless. Most options expire within a few months.

The writer or short seller of an option will net more if the option expires without being exercised. The asset on which the contract is written is called the “underlying,” and the value of the option contract will depend on whether the price movement of the underlying asset has caused the option to be “in the money” or “out of the money.”

More details on the workings of these instruments will be given in related articles. Options are one of several kinds of second-level securities known as “derivatives,” because their value is based on the price of another asset. Options can come in the form of Calls, Puts, and strategies that combine them in unique ways.