Options trading is the act of buying and selling option contracts. Options are financial instruments whereby the seller gives the buyer the right to buy or sell a predetermined number of shares at a specified price within an established time period.
An option is either classified as a Call, which gives the holder or buyer of the option the right to purchase the underlying security, or a Put, which gives the holder or buyer the right to sell the underlying security.
Option trading takes place between the buyer and seller of the option contract. Option contracts are defined by the type of option, the underlying security, the number of shares or unit of trade, the strike price and the expiration date. The strike price refers to the price at which the underlying security can be bought or sold before the expiration date arrives.
Options trading is a form of derivatives trading because the value of an option is derived from the value of the underlying investment security. Similar to stocks or bonds, options are types of investment securities. However, they also represent a binding contract between the buyer and seller. Options can be traded by individual investors, professional traders or institutional investors within a securities marketplace.