What an Option Is
An option is a contract that gives you the right, but not the obligation, to buy or sell a stock at a set price before a set date. Here are the basic terms, how contracts are sized and how popular options have become.
A right, not an obligation
Buying an option is a bit like putting a deposit on a house: you pay a fee to lock in a price, and you can walk away if things change. The buyer pays a price, called the premium, for the right. The seller collects the premium and takes on the obligation to follow through if the buyer uses the right.
The key terms
| Term | Meaning |
|---|---|
| Call | The right to buy at a set price |
| Put | The right to sell at a set price |
| Strike price | The set price in the contract |
| Expiration | The last day the option is valid |
| Premium | The price paid for the option |
| Contract size | Usually 100 shares per contract |
Standard terms for U.S.-listed stock options.
Contracts cover 100 shares
Option prices are quoted per share, but one standard contract covers 100 shares. So an option quoted at $2.50 costs $250 per contract, before commissions. This multiplier is the most common source of confusion for beginners.
A huge market
The Options Clearing Corporation, which guarantees U.S.-listed options, reported an average of about 70.8 million contracts a day in 2026 through August, up about 23% from a year earlier. Much of the growth has come from individual traders and very short-dated options. Brokers require you to apply and be approved for options trading, and to receive a standard risk disclosure booklet first.
Key takeaways
- An option is a right, not an obligation.
- Calls are rights to buy; puts are rights to sell.
- One contract usually covers 100 shares.
- Options trading requires broker approval.