What Is an Option? The Plain-English Definition

Reviewed by Leon Moyer - Published September 29, 2026 - Last reviewed October 9, 2026

An option is a contract that gives its buyer the right, but not the obligation, to buy or sell an underlying asset, usually 100 shares of a stock or ETF, at a fixed price on or before a fixed date. The buyer pays the seller for that right, and the price is called the premium.

If you have ever put down a deposit to hold something at today's price, you already understand the core idea. You pay a small amount now for the right to make a bigger decision later, and if things change, you can walk away having lost only the deposit. Options work the same way, just with shares of stock instead of a house or a car.

What does each part of the definition mean?

Every word in that definition matters, so let's take it apart.

• A contract. An option is an agreement between two parties: one who buys it and one who sells it. Listed options in the United States trade on regulated exchanges, and every trade is cleared through The Options Clearing Corporation (OCC), which stands between the two sides so neither has to trust the other personally.
• The right, but not the obligation. The buyer gets a choice. They can use the option if it helps them, or let it go if it does not. That choice is the thing being bought and sold.
• An underlying asset. Options are derivatives: their value comes from something else. In this course, that something is almost always a stock or an exchange-traded fund (ETF).
• A fixed price. Called the strike price. It is the price at which the buyer can buy or sell the underlying shares.
• A fixed date. Called the expiration date. After it passes, the right disappears.

What are the four parts of an option contract?

When you look at any option, you will see the same four pieces of information. You will study each one in detail in the next module, Anatomy of a Contract, but it helps to meet them now.

A trader might describe that contract out loud as "the XYZ 50 call expiring next month." Once you can read that phrase, you can read almost any option.

How many shares does one option contract control?

A standard U.S. equity option controls 100 shares of the underlying stock. This number is called the contract multiplier, and it trips up almost every beginner at least once.

Option prices are quoted per share. So if an option is quoted at $2.00, buying one contract actually costs $2.00 x 100 = $200, before commissions and fees. That price is the premium, and the rule is simple: option cost = quoted price x 100 x number of contracts.

There are exceptions, such as contracts adjusted after a stock split or merger, which The Contract Multiplier and Adjusted Options covers. For now, assume one contract equals 100 shares.

What are calls and puts?

There are only two types of options, and everything else in options trading is built from combinations of them.

• A call option gives the buyer the right to buy 100 shares at the strike price. Call buyers generally benefit when the stock rises.
• A put option gives the buyer the right to sell 100 shares at the strike price. Put buyers generally benefit when the stock falls.

A memory trick many traders use: you call something toward you (buy it), and you put something away from you (sell it). Call Options Explained and Put Options Explained cover each one in depth.

What does the buyer get, and what does the seller owe?

Here is the part that makes options different from simply buying stock. Every contract has two sides, and they are not symmetrical.

• The buyer (also called the holder or the long side) pays the premium and receives a right.
• The seller (also called the writer or the short side) receives the premium and takes on an obligation: if the buyer decides to use the right, the seller must fulfill it.

Using the right is called exercising the option. When a buyer exercises, a seller of that same contract is assigned and must deliver on the promise. Buyers and Sellers is devoted to this relationship, because understanding which side you are on is the single most important risk question in options.

What are common misconceptions about options?

A few misconceptions are worth clearing up early.

• An option is not a share of stock. Owning a call does not make you a shareholder. You do not vote, and you generally do not receive dividends unless you exercise and actually own the shares before the ex-dividend date.
• An option is not a bet with a bookmaker. It is a standardized, exchange-traded contract with a clearinghouse guaranteeing both sides.
• An option is not permanent. Every option has an expiration date. Time is one of the forces working on its price every single day, which What Is Theta in Options? covers as theta.