Option Definition

An option is a financial derivative representing a contractual obligation between the option writer and the option holder. The contract guarantees the option holder’s right-but not obligation-to purchase or sell a financial asset at an agree-upon price, called the strike price, until an expiration term specified in the contract.

Options are valuable for many reasons, including the relatively risk-free process of exercising them. For example, if the optioned asset increases in value there is little reason for an option holder not to exercise the option, while if the optioned asset decreases in value there is no reason for the option holder to exercise the option.